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Extra Payments to Quickly Eliminate Student Loan Debt Could be a Mistake

Many borrowers prioritize paying off their student loan balances. This strategy isn’t the worst idea, but better options are often available.

Written By: Michael P. Lux, Esq.

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Erasing student debt as fast as possible is a primary goal for many student loan borrowers.

This approach makes sense. Student loan balances are often as large as a mortgage, and the longer the debt lingers, the more the borrower spends on interest.

It’s the reason I urge borrowers not to ignore their debt. It is the reason I push many to pay a little extra each month.

However, I fear that some borrowers are becoming too focused on their student loans. An obsession with eliminating student debt is helpful but taken to the extreme, it becomes risky.

Emergency Funds Are More Important

Before starting a campaign to get your student loan balance down to zero, it is essential to build an emergency fund first.

Financial emergencies are not an unlikely possibility. They are a practical certainty. You might lose your job. Your rent could go up. Your roof might leak. You might get sick.

The list of potential financial emergencies is endless.

Having some money set aside for one of these events is essential. If you don’t, your financial emergency could lead to high-interest credit card debt or a pricy personal loan. Some desperate people even turn to dangerous payday loans.

If you have an emergency fund, you can weather the storm.

How much should I set aside in my emergency fund? Many financial experts suggest at least 3-6 months of living expenses. However, there are many factors to consider that could increase or decrease the fund size that you need.

Saving for Retirement Could be Better Investment

Balancing saving for retirement and eliminating student loan debt can get tricky.

You don’t want to allow your student debt to fester, but you don’t want the financial crisis of today to create the financial crisis of the future.

In some cases, making the decision is easy. If your employer offers a generous match to your contributions, prioritize taking advantage of this benefit.

However, striking the right balance isn’t always obvious. Stock market returns are hard to predict. If you are many years from retirement, it might not seem necessary.

The important thing is that all borrowers understand that there are ways to save for the future and eliminate student debt at the same time.

Interest Rates Matter

Some people get caught up in the idea that student loans are bad, so I must eliminate them immediately.

It’s not the worst attitude, but some context is important.

If you have a credit card debt at 28% interest, eliminating your student loan charging 5.5% isn’t the most pressing issue.

This might seem obvious in the case of high-interest debt, but there are other angles to consider. Do you have a fixed-rate student loan with a really low-interest rate? With some banks now paying nearly 4% on high-yield savings accounts and CDs, it could make sense to pay the minimum and put your money to work elsewhere.

Options to Make Student Debt More Manageable

Many borrowers get overwhelmed by complicated student loan rules. As a result, they decide to pay the debt off right away.

However, within those frustratingly complicated rules are opportunities to save money. Before aggressively paying off federal loans, it is worthwhile to look at the many perks and protections that come with federal loans. A bit of research could mean substantial savings.

Borrowers saddled with the less forgiving private loans still have options. Refinancing with a private lender could mean a significantly lower interest rate and ease of repayment:

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review

Don’t Get Carried Away

To be clear, the suggestions of this article are not an invitation to ignore student debt or to pay the minimum.

Having a plan to erase your student loans is critical.

However, it is also crucial to look at your student debt within the context of your finances and goals. You may discover that how you spend your money doesn’t match your priorities.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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