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Student Loan Borrowers Advised to Weigh Pros and Cons of Paying Off Loans Early

S.J. Steinhardt
Published Date:
Sep 22, 2023

Paying off one’s student loans early may not be a good decision in the face of economic uncertainty, financial advisers told Bloomberg.

In such an environment, “maintaining a balance between loan repayment, investment and savings becomes even more crucial,” said Leyder Murillo, managing director at Wolfpack Wealth Management in Denver.

Determining what is affordable is important. “If making a large payment means depleting your emergency fund, think again,” said Kelly Palmer, founder of Wealthy Parent, a financial planning service, in Chicago.

Experts typically recommend keeping three to six months of living expenses in cash or a cash-like product, but some are advising to increase that to nine to 12 months.

A borrower should also make a determination based on the loan’s interest rates. Those whose loans have high interest rates may want to pay them off early, as that could save them thousands of dollars, depending on the loan amount, Palmer said. But she advised borrowers to give priority to paying off credit card debt with even higher rates. Borrowers can also consolidate their student loans.

Some borrowers may be eligible for loan forgiveness.

The Public Service Loan Forgiveness program (PSLF) is available to those who work in government, teaching, nonprofits or other qualifying jobs. This program will forgive the debt of those who enroll and make 10 years of qualifying payments.

There are also income-driven repayment programs. The Biden Administration’s new income-driven repayment tool is one option that borrowers can use to determine their best repayment strategies. Called Saving on A Valuable Education (SAVE), this tool will forgive the debt of borrowers who make at least 20 to 25 years of qualifying payments based on their income.

Other such programs can be especially useful for those who owe hundreds of thousands of dollars.

“If you are taking advantage of PSLF, or the new SAVE plan, you may be better off paying just the minimum and planning on forgiveness,” Jay Zigmont, the founder of Childfree Wealth in Mississippi, told Bloomberg.

For those who do not qualify for forgiveness, and whose loans have a relatively low interest rate, making the minimum payments while using a larger portion of savings for goals such as a down payment on a home may be advantageous. Investing that cash may be worthwhile, too, said Holly Trantham, the creative director of the website The Financial Diet. She noted that some high-yield savings accounts offer a higher interest rate than the interest rate on some loans.

She added that depleting one’s savings can end up being more stressful than it’s worth, especially if it means taking on a second job or making other sacrifices.

“Not ever going out, not socializing, not putting money towards anything else—I don’t think that's ultimately a worthwhile goal because you do still have to live,” she said.