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How Fast Should You Pay Off Your Student Loans?

Maurie Backman, The Motley Fool

Most students want to get rid of their debt as soon as possible -- but there are certain goals and milestones that shouldn't be sacrificed along the way.
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Student loan application paperwork on a clipboard.

Workers who graduate college typically out-earn those with just a high school diploma, which is why pursuing a degree makes sense. But higher education comes at a high cost. Among 2018 graduates who took on student loans, the average balance is $29,800, and Americans owe a collective $1.56 trillion in student loans. That's about $521 billion more than what U.S. adults owe on their credit cards.

If you're among the nearly 45 million Americans carrying student debt, you're probably eager to shed that burden as quickly as possible. While it's smart to push yourself to pay off your loans ahead of schedule, you shouldn't let other important goals fall by the wayside. Here's how to strike the right balance.

Federal vs. private loans

Not all student loans are created equal. There are federal loans and private ones, and generally speaking, you're best off avoiding the latter at all costs.

Federal loans are issued by the government, which means their terms, including their interest rates, are regulated. Federal loans also offer a number of key protections for borrowers who find themselves struggling to keep up with their payments. For example, if you have federal loans, it's possible to apply for an income-based repayment plan so that your monthly obligations reflect your ability to pay. It's also possible to defer your federal loan payments completely if you're experiencing a true financial hardship.

Private loans, by contrast, are issued by private lenders, and as such, they aren't regulated the same way federal loans are. Private lenders can charge as much interest as they want, and they're not required to give you a break if you you're struggling to keep up with your payments.

Clearly, it pays to max out your federal loan options before resorting to private lenders. But because federal loans come with borrowing limits, many students are often forced to borrow privately when their education costs exceed the amount they're entitled to borrow more affordably.The standard repayment plan for federal loans is 10 years, so if that's where all of your educational debt stems from, and you're managing your payments well, you might just sit back and stick to that time frame. Federal loans, by nature, don't have exorbitant interest rates attached to them, which means you don't necessarily need to push other goals aside to accelerate your payment schedule -- though if you have extra money lying around and are on track to achieve your other financial goals, it makes sense to make some extra payments and get rid of those loans sooner.

If much of your student debt comes in the form of private loans, on the other hand, then you're potentially looking at a much lengthier repayment period. The terms of your repayment plan will depend on the specifics of your loan, but it's not unheard of to repay a private loan over 20 years or more. If that's the case, then it generally pays to knock out some of that debt sooner to avoid racking up mounds of interest charges. The key, however, is to balance your loan payments against other important financial matters.

Financial goals your student loan payments shouldn't trump

As a general rule, you should always aim to keep up with your student loan payments (especially private ones) and accelerate them as money allows for. At the same time, you shouldn't let your desire to ditch your student debt impede equally (or more) important financial goals.

First, there's your emergency fund. No matter your age or income level, you should aim to have three to six months' worth of living expenses in a savings account at all times. Without emergency savings, you'll risk racking up costly debt the second an unplanned bill lands in your lap or you find yourself out of a job. In fact, building an emergency fund should be your No. 1 priority, which means that if you have the money to make extra student loan payments, you shouldn't go that route unless that safety net is fully established.

There's also retirement to think about. You may think it pays to put all of your extra money into your student loans and focus on your IRA or 401(k) once you're college debt-free. In doing so, you'll lose out on years of compounding, which will stunt your nest egg's growth. Therefore, once your emergency fund is complete, you might think about splitting your extra resources evenly between your retirement plan and your outstanding student loans, provided they're federal in nature. If you're paying a boatload of interest on private loans, you might focus more of your resources on knocking them out and then put more money into a retirement plan once you're student-debt free.

Just don't put off retirement savings completely, even if you're stuck with a giant batch of private loans and the interest that comes with them. If you wait too long to build your nest egg, you'll risk falling short during your golden years.

Furthermore, if you're carrying credit card debt, you should focus on eliminating that burden before knocking out your student loans. Not only can a large amount of credit card debt cost you tons of money in interest charges, but it can also damage your credit score, making it harder for you to borrow money as the need arises. Credit card debt is universally considered the "bad" kind of debt, because it carries a high interest rate and generally does not finance purchases that will return your investment. Meanwhile, student debt is considered the "good" kind of debt, because it tends to have a relatively low interest rate, and it finances higher education, which can seriously raise your earnings potential.

You're probably paying a much higher interest rate on your credit card debt than you are on your student loans -- even if you borrowed privately. It makes more sense to pay off a credit card with a 24% interest rate before a student loan with a 12% rate.

Finally, if you're hoping to buy a home, you don't necessarily need to let your student debt get in your way. As long as you have emergency savings, aren't carrying credit card debt, and are on track for retirement, you can split your extra cash between paying off your loan balance and saving up for your down payment.That said, there are benefits to waiting until you're free of your student loans to buy a home. Once you buy, you're responsible for not only a mortgage, but property taxes, insurance, and maintenance. As such, it pays to wait until a portion of your income isn't monopolized by student debt. This especially holds true if you're on a 10-year repayment plan and expect to be free of your loans at some point in your early-to-mid 30s, since that's a reasonable stage in life to buy a first home.

Eliminating student debt faster

Your desire to rid yourself of student debt shouldn't stop you from building emergency savings, setting funds aside for retirement, or paying down your outstanding credit card balances. That said, it pays to eliminate your student loans faster if you can.


If you borrowed privately for college, look into your options for refinancing. All that means is swapping an existing loan for a new one, but if your credit score is good, you might snag a much lower interest rate, thereby lowering your monthly payments and making it possible to get ahead of them.

Cutting expenses in your budget is another good way to knock out your student debt faster. If you don't yet have a budget, list your recurring monthly expenses, factor in one-time expenses that pop up randomly throughout the year, and compare your total spending to your total take-home pay. If you don't like the result (meaning, you're left with little money at the end of each month to put toward extra loan payments), identify some expenses you're willing to cut, whether it's your cable plan, your weekly takeout meals, or the car you enjoy having but can technically live without.

Another option? Move in with family for a while. This can be a relatively easy way to save huge sums of money, especially if you're fairly young and unattached. If your folks are willing to let you live rent-free for a spell, you can use your savings to pay down your student debt at a much more rapid pace.

One additional thing to keep in mind is that some companies are starting to offer help with student loan repayment as part of their benefits package. If your employer doesn't, you might bring it up during your next workplace survey, or casually mention it to an HR person when you get the chance. Participating in that sort of program could help you shed that debt faster. Just bear in mind that student loan assistance may come with strings attached, like an agreement to work for the company for a certain amount of time.

Finally, consider a side job in addition to your regular one. Since the money you earn from it won't already be earmarked for existing bills, you'll have the option of using all of it to pay down your student debt, or do so in conjunction with the aforementioned goals.

Breaking free from debt: the sooner, the better

The sooner you pay off your student loans, the sooner you can accomplish more rewarding financial goals. If you have extra cash to apply to your loans, you might as well chip away at whatever balance you're looking at. Even if you're inclined to invest that money instead, remember that the stock market has averaged about a 9% annual total return over the past 50 years, whereas the interest rate on a private loan may be much higher. As such, it pays to save yourself that interest, since investment returns are never guaranteed.

That said, don't let your desire to pay off your student loans thwart those goals that are equally important, if not more so. Ten years is a common repayment period for federal and private loans alike, which means students who graduate at the "traditional" age of 22 could be debt-free by their early 30s. And while you don't necessarily want to be paying off student loans in your 40s or 50s, if that's what it takes for you to manage those payments and meet your other goals, you certainly shouldn't beat yourself up over it.

Nobody loves carrying student loan debt, but remember that it can help you boost your credit score, provided you keep up with your payments. On top of that, you may be eligible to deduct your student loan interest on your taxes.

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