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Should I Pay Off My Student Loans Early?

Many financial planners, myself included, group debts into two broad categories — good debts and bad debts. Good debts include those that have relatively low interest rates and will help enhance your life. For example, a mortgage allows you to buy a home, which will hopefully increase in value over time. An auto loan (assuming the interest rate is reasonable) helps you buy a car, which can in turn get you to work so you can earn money.

On the other hand, the “bad debts” category include debts that have relatively high interest rates, and/or don’t do much to enhance your life. Credit card debt is the textbook example of a bad debt, especially if it was incurred while buying things you really didn’t need.

I’d classify student loan debt as a form of good debt, but it’s really in a category all by itself. Even though student loans may have slightly higher interest rates as a whole than mortgages and don’t necessarily get you a tangible asset, I’d put student loans ahead of mortgages in many cases. Here’s why:

With that in mind, like most personal finance concepts, there’s no one-size-fits-all answer when it comes to paying student loans early. There are some situations where early repayment makes sense, but others where you’d be better off investing the money or using it to pay down other types of debt.

When paying your student loan debt early is a smart idea

Despite the benefits, accelerating your student loan repayment certainly makes sense in some circumstances. While this isn’t an exhaustive list, here are three situations where it can make sense to direct your discretionary income toward your student loan debt.

When you should pay down other debts or invest instead

The bottom line on student loan early repayment

One important thing to point out is that several of these options could apply to you —  even things from both the “pay early” and “invest instead” categories. For example, it’s entirely possible to have a private student loan that will never qualify for loan forgiveness, but at a low, fixed interest rate.

Every situation is different, so my point here is that it’s important to weigh the applicable reasons both for and against early student loan repayment to make a smart financial decision for you.

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