Whether you should pay off student loans depends on balancing debt freedom with other financial goals like retirement savings, emergency funds, and high-interest debt; it's often best to prioritize high-interest private loans and build savings first, while federal loans offer forgiveness options that might make paying them off slower (or faster if you have high rates) a better strategy, especially if you have other urgent financial needs.
"If you have the funds available, paying off the loans first is a smart move," says MaryAnne Gucciardi, a CFP with Wealthmind Financial Planning. "That's a guaranteed 6.55% 'return,' which is higher than what you're likely earning in even the best high-yield savings account."
The interest rate on student loans is also often lower than other debts such as personal loans, car loans and credit cards. Focusing on paying these off first could make you better off financially as you'll pay less in interest.
50% of your budget goes to necessities: rent, utilities, transportation, insurance, groceries, etc. 30% goes to wants: dining out, shopping, gym membership, entertainment, etc. 20% goes towards savings and debt repayment: student loans, auto loans, credit cards, emergency savings, etc.
The "7-year rule" for student loans generally refers to when negative marks, like defaults, are removed from your credit report (around 7 years after the first missed payment or default date for federal loans, 7.5 years for private loans), but the debt itself doesn't disappear and must be paid off; it's also a benchmark in bankruptcy proceedings where federal loans can become dischargeable after 7 years from when payments were due, though proving "undue hardship" is required and difficult.
The best way to pay off student loans involves a combination of strategies: pay more than the minimum, use the avalanche method (highest interest first) for savings or snowball method (smallest balance first) for motivation, automate payments to save on interest, consider refinancing for lower rates (federal loans lose benefits), and explore federal income-driven plans (IDRs) or Public Service Loan Forgiveness (PSLF) if eligible. Budgeting, increasing income, and tackling extra payments with bonuses or refunds also significantly speed up repayment.
Dave Ramsey's debt payoff strategy centers on the Debt Snowball method, a behavioral approach focusing on paying off debts from smallest balance to largest for motivational wins, combined with strict budgeting, cutting expenses, increasing income, and eliminating new debt, all part of his broader 7 Baby Steps plan, particularly Baby Step 2. The core idea is that behavior (80%) drives finance (20%), so small wins build momentum to tackle bigger debts, rather than focusing solely on high-interest rates.
Rushing to pay off student loans can leave other important financial priorities neglected. Without an emergency fund, a sudden job loss or unexpected expense could force you into high-interest debt, like credit cards or personal loans.
The average student loan debt owed per borrower is $28,950, so $80K is a larger-than-average sum. However, paying off your balance is possible. Since payments on an $80,000 balance can be high, extending the repayment term to lower monthly payments may be tempting.
Paying off student loans can cause a temporary small dip in your credit score due to closing an installment loan (affecting credit mix and average account age) but offers long-term benefits like a lower debt-to-income (DTI) ratio, making it easier to get new credit, with scores usually rebounding quickly as positive payment history remains. The exact impact depends on your overall credit profile, but avoiding missed payments on loans is far more crucial for your score than the temporary dip from paying them off.
Whether you should pay off student loans early depends on your financial situation, but generally, it's good if you have a solid emergency fund, high-interest debt, and don't need federal loan benefits (like forgiveness); however, it's often better to prioritize an emergency fund, retirement savings, and other high-interest debts first, especially if you have federal loans that qualify for forgiveness programs. Paying early saves interest and lowers debt-to-income (DTI), helping with future loans like mortgages, but it reduces your cash liquidity and can cost you potential tax deductions or loan forgiveness, according to Bankrate and US News Money.
One important thing to remember is that student loans are written off after a certain period. For most plans, this happens after 30 years, although there are exceptions. For example, Plan 1 loans are written off when you turn 65 or after 25 years, depending on when your loan was paid.
Any borrowers with loans that had accumulated eligible time in repayment of at least 20 or 25 years (240 or 300 months) saw automatic forgiveness, even if they were not at that time on an IDR plan. Borrowers will continue to see the COVID-19 related forbearances counted toward IDR and PSLF forgiveness.
More than 9mn US borrowers miss student loan payments as delinquencies rise.
Your interest charges will be added to the amount you owe, causing your loan to grow over time. This can occur if you are in a deferment for an unsubsidized loan or if you have an income-based repayment (IBR) plan and your payments are not large enough to cover the monthly accruing interest.
One rule to live by is to try to limit your total amount of student loans to a small percentage of what your expected annual salary may be from the first job you get after college. For example, you could decide that your monthly loan payment should be no more than 10 percent of your gross income.