No doubt you’ve heard the back-and-forth over the past several years regarding student loan forgiveness. Let’s talk about the question of “Should I pay off my student loans?”
It’s hotly debated, and most people feel pretty strongly one way or the other. Either you’re pro-forgiveness or you’re not. But I’m not here to try to convince you either way. Should you pay off student debt, and what’s the best way to do it?
Should I Pay Off My Student Loans? The Quick-Hitting Answers
First of all, student loans are an obligation. As a borrower, you signed documentation promising to repay any loans within a reasonable amount of time. So that’s the basic answer – you said you’d pay them back!
Secondly, student loans are typically not discharged in bankruptcy proceedings. So if you’re hoping to wipe the slate clean through bankruptcy, it’s not that easy.
Thirdly, your student loans hold you back from building wealth for the future. Paying them off quickly frees up cash for other financial goals.
COVID-19 and Student Loan Forbearance
One “silver lining,” if you can call it that, of the coronavirus pandemic is student loan interest forbearance.
It’s been extended several times since March 2020. Now the Department of Education is giving student borrowers a break until at least September 30, 2021. You can pause student loan payments during this time.
What forbearance means:
- Student loan interest is paused from March 2020 until September 30, 2021.
- Federal student loan borrowers will pay 0% interest temporarily.
- Your credit score won’t be hurt by not paying on student loans.
- You won’t add any interest to your current principal.
Why continued payments are smart during forbearance
The pause on interest charges is meant to help anyone who’s in financial hardship due to COVID-19. Maybe you’ve lost your job or had hours cut. It’s totally understandable if you can’t afford student loan payments right now.
However, if you are still financially able to make loan payments, it’s not a bad idea. You’ll benefit from the extra money applied to the principal, rather than the interest.
While it’s tempting to stop payments, you could save yourself a lot of money by continuing to pay while the interest rate is zero. You’ll reduce your total loan balance faster and end up paying less overall.
What About Student Loan Forgiveness? Should I Pay Off My Loans If I’m Eligible?
As you know, plenty of politicians included some form of student loan forgiveness in their campaign platforms in 2020. There were debates over how to apply the cancellation of student debt—whether it should be for every kind of student debt, or just certain circumstances.
Some wanted full cancellation no matter what, while others picked a figure like $50,000 or $10,000 that they wanted forgiven. It’s uncertain whether legislators would approve of such a plan, or how quickly it might happen.
Student loan forgiveness programs already in place:
- Public Service Loan Forgiveness (PSLF)
- Teacher Loan Forgiveness
- Closed School Discharge
- Perkins Loan Cancellation and Discharge
- Total and Permanent Disability Discharge
- Discharge Due to Death
- Discharge in Bankruptcy—but this is rare and not automatic
- Several other options exist as well.
If you’re eligible for any type of student loan forgiveness or cancellation, do your research. Double- and triple-check with the Department of Education and your loan provider to ensure that you qualify. (Not everyone does!)
Many loan forgiveness programs require the borrower to make a certain number of payments. It’s 120 consecutive monthly payments for PSLF, for example. Making ten years of payments is a big commitment, and you might prefer to just pay them off quickly.
Now, I’d be remiss to ignore the question of the new administration. Of course, President Biden has spoken of forgiving some student loans.
- Will it actually happen?
- And how quickly?
If possible, follow the rules to qualify for forgiveness, and throw a party if it happens. But don’t count on having all, or even any, of your loans simply wiped out.
Rejection rates are incredibly high among student loan forgiveness applications. Only about 1% of applicants have actually gotten loan forgiveness through PSLF. So be prepared!
If you think you have a good chance of getting your student loans paid for by one of these programs, then put the student loans toward the back of your debt snowball/avalanche. Once you get to them, save up the money and put it into a savings account (as if you were paying the loan off, but just stashing it away in savings instead).
If the forgiveness program actually comes through and pays off your debt, then great! Use that savings toward something else.
If not, that sucks, but then you at least have the money right there to pay it off yourself anyway!
Either way, BOOM, the debt is gone!
Should I Pay Off My Student Loans If I Have Other Debt?
If you have multiple sources of debt, this might be a good time to review a few common debt-payoff strategies. It’s hard to figure out where your focus should be when so many creditors are vying for your attention.
You may have:
- Mortgage debt
- Credit card debt
- Personal debt
You’ve probably heard of both the “debt snowball” and the “debt avalanche.” They’re simple ways of breaking down your various types of debt.
Essentially, the debt snowball requires that you pay off your smallest loan amounts first, regardless of interest rates. (Here’s a free debt snowball calculator to help you out!)
On the other hand, if you use the debt avalanche, you’ll pay off your highest-interest debts first, regardless of their amounts.
So if you’re pausing student loan payments until the end of September, you could focus on your other debts and needs. That’s totally fine! Put a dent in your high-interest debt balances for now instead.
What About My Other Financial Priorities?
Maybe you’re asking “Should I pay off my student loans?” because you simply want to focus on other things.
There are plenty of big expenses to consider, after all.
- Bulking up your emergency fund
- Saving for a down payment on a home
- Investing more in your retirement accounts
- Putting away money for a major upcoming expense (vehicle, medical procedure, home renovation, starting a business)
Definitely, you need to be mindful of your whole financial picture.
Should I pay off my student loans? Yes, and as quickly as possible. But an emergency fund is an absolute necessity. If you don’t have at least a grand saved up for random emergencies, work on that ASAP. Then, take care of your debts and expenses.
It’s probably okay to defer some of the other big goals for a few years if you plan to knock out student loans rapidly. But if it’s going to take you a decade, then start investing in a 401(k) while paying off the debt. Plan ahead, even if you can’t save much for retirement or other goals for a while.
AUTHOR Kate Underwood
Kate Underwood loves reading, talking, and writing about all things in personal finance. She made the switch from her high-school teaching career a few years ago to become a full-time freelance writer and editor and can be found at kateunderwoodwriter.com.