Should I Pay Off My Student Loan in a Lump Sum?

Quick Answer

Paying off your student loans in one lump sum may have a financial benefit, but it isn’t always the best move. The money might go further paying down debt with a higher rate of interest, providing the stability of a flush emergency fund or going toward your retirement savings.

A woman is at home and writes on a piece of paper from her work desk.

If you're in the position to pay off your student loans in one fell swoop, doing so may feel like a no-brainer. Who wouldn't want to rid themselves of a large chunk of debt? But the truth is that it doesn't always make the most financial sense when looking at the big picture. Factors like your other debts, cash savings and monthly cash flow all come into play. If, for example, you also have high-interest debt or lack a solid emergency fund, your money might be put to better use elsewhere.

Eliminating your student debt with a single lump-sum payment isn't something you can undo after the fact. It's wise to weigh the pros and cons beforehand to make sure it aligns with your overall financial health.

What Are the Benefits of Paying Off Student Debt?

Let's start with the advantages of paying off your student debt. For starters, you'd be eliminating a regular bill. The average monthly student loan payment is roughly $460, according to the Education Data Initiative. Getting rid of your payment could instantly create more room in your budget and allow you to save for other financial goals.

Wiping out your balance can also save you money in the long run. For the past five years, the average interest rate for federal undergraduate student loans has been 4.11%. Private student loans, on the other hand, average from 6% to 7%, according to the Education Data Initiative. Doing away with your balance might eliminate years of interest payments, which could add up to significant savings.

Let's say you owe $10,000 on a private student loan with a five-year term and a 7% interest rate. By sticking to this repayment schedule, you'd shell out over $1,880 in interest through the life of the loan. Paying off the loan in full today allows you to sidestep these fees.

Is Paying Off Student Loan Debt Always a Good Idea?

Paying off student loan debt in a lump sum isn't always financially prudent, especially if it will strain your financial well-being. If doing so will require you to deplete your emergency fund, you could be putting yourself in a vulnerable situation. A commonly used rule of thumb is to set aside three to six months' worth of expenses in a liquid cash savings account. When your next financial surprise comes your way, you'll have that safety net.

You'll want to consider your retirement fund as well. Are you on track with long-term savings? Financial planners recommend the following benchmarks:

  • Age 30: Have one year's worth of your current annual salary
  • Age 40: Have three times your current annual salary
  • Age 50: Have six times your current annual salary

If you're behind on retirement savings, then pouring excess cash into your student loans might not make the most financial sense—especially if that debt has a reasonable interest rate. Expected investment returns play a role here.

Let's go back to the example we mentioned earlier and pretend you have an extra $10,000 on hand. Instead of putting that money toward a student loan with, say, a 4% interest rate, you might choose to invest in your retirement accounts instead. The stock market has produced an average annual return of 10% since the 1920s. Past performance doesn't guarantee future returns, but it stands to reason that investing could be a better way to grow your wealth over time.

You might also use a cash windfall to cross a big financial milestone, like making a down payment on a home or paying off higher-interest debt. As of the second quarter of 2022, the average credit card APR was 16.65%. Debt like this will cost you more money in the long term than a lower-interest student loan.

How to Make Student Loan Payments More Affordable

If you decide not to pay off your student loans, you might still find ways to make your payments more affordable. Public student loans, which are provided by the federal government, offer certain protections for eligible borrowers. This includes:

  • Income-driven repayment plans: This could bring your monthly payment down to 10% to 20% of your discretionary income. Income-driven repayment plans can also extend your repayment term. If your budget is tight, it could help you lock in a more reasonable monthly payment.
  • Loan forgiveness programs: Certain borrowers may qualify for student loan forgiveness. Those who work for a government agency or eligible nonprofit, for example, can explore public service student loan forgiveness. They must work full time, make 120 qualifying payments on an income-driven repayment plan and have federal direct loans. Your remaining loan balance will be forgiven after meeting all these requirements. Similarly, teachers can have their loans forgiven if they meet certain eligibility criteria.
  • Refinance your student loans: If you're stuck with a high interest rate, refinancing your student loans might be worth exploring. This involves taking out a new loan that has a lower interest rate, then using that to pay off your open balances. You may also choose to extend your repayment term and secure a lower monthly payment. Just keep in mind that refinancing federal student loans will take income-driven repayment plans and loan forgiveness programs off the table.
  • See if your employer will help out: Check your employee benefits to see if your employer will kick in toward your student loans. An estimated 17% of employers currently offer student loan assistance, according to the Employee Benefit Research Institute. For example, they may match some or all of your payments.

The Bottom Line

Paying off your student loans in one lump sum can be a smart move, depending on your financial situation and other debts. In other cases, it might make more sense to keep your student debt and use a cash windfall to reach other financial milestones.

No matter what, maintaining strong credit is always key—consider it a core piece of financial wellness. Free credit monitoring with Experian can be a great resource, whether you pay off your student loans or not.