When It Doesn’t Make Sense to Pay Off Your Loans Early

By Andrew Josuweit, CEO of Student Loan Hero

When it comes to student loans, I’m usually an advocate for paying them off as quickly as possible. They are a huge weight to carry around for a decade or more, and getting rid of them ahead of schedule can give you more freedom to pursue your interests and life goals.

However, there are situations where paying your debt off early does not make financial sense. Particularly for military service members and veterans, eliminating your loans is not always the best decision.

The Military and Student Loans

According to Pentagon officials, 41 percent of the armed forces have student loans. Financial stress is also one of the biggest concerns troops face today. In fact, many say their finances are more worrisome than going into battle.
Fortunately, the government has launched several military loan forgiveness programs to help servicemembers and veterans get rid of their debt:

  1. Public Service Loan Forgiveness (PSLF): PSLF is a program for government, nonprofit, and other public service employees. Under this program, remaining student loan debt is forgiven after making qualifying payments for 10 years. The first program participants are eligible to have their debt forgiven beginning in October 2017. As of 2016, there is no cap on the amount that can be discharged.
  2. National Defense Student Loan Discharge: If you had a Perkins or Direct Loan and served in an area designated as an imminent war zone, you may qualify for the NDSLD. This option only offers a partial discharge.
  3. Military College Loan Repayment Program: There are enlistment incentives if you sign up for the Army, Navy, Air Force, or National Guard, valued up to $65,000. Each branch has its own requirements and restrictions, so talk with a recruiter before pursuing this option.

After your years of service, worrying about student loans is the last thing you should have to do. These programs can help eliminate some or all of your loans. If you qualify for one of these options and have a significant amount of debt relative to your income, paying off your loans ahead of schedule may not be the wisest decision.

Paying Loans Off Early Vs. Holding Out For Loan Forgiveness

Paying off your loans sounds great on paper. If you eliminate the loans early, you can save thousands of dollars in interest and pursue your major financial goals that much sooner.

However, when we look at real numbers, you may be surprised at how much paying off your loans can cost you if you are in the military.

The average 2016 graduate who took out loans for school graduated with $37,172 in debt and earns approximately $50,000 per year. Assuming a federal loan with an interest rate of 3.90 percent, following the 10-year Standard Repayment Plan would result in a monthly payment of $375. That’s a total of $44,950 paid over the life of the loan.

If you opted to pay extra towards your loan to eliminate it early, you could cut down on the interest you owe. If you put just an extra $100 a month towards your debt, you could pay it off in 7.6 years and pay only $5,791 in interest, cutting the total cost to $42,963 – a savings of nearly $2,000.

However, that savings could be far less than if you were to pursue an income-driven repayment plan and loan forgiveness.

For example, under the Pay As You Earn (PAYE) plan, you would pay back just $40,652 and have $5,856 forgiven through Public Service Loan Forgiveness, based on the numbers above. That would result in a total savings of $2,311.

If you qualify for PSLF by serving in the military,  it may not be a good idea to pay more towards your loans than necessary during your repayment term. After 10 years of qualifying payments – and income-driven plans like PAYE do qualify – your remaining balance is forgiven. Paying more just to get rid of them earlier will only cost you money.


Repayment Plan Total Amount Paid Amount Forgiven Repayment Period
Standard $44,950 0 10 years
Accelerated ($100 extra a month) $42,963 0 7.6 years
PAYE and PSLF $40,652 $5,856 10 years

Evaluate Your Goals

While being debt-free early sounds appealing, really examine your goals for your future and your financial needs. Paying more towards your loans to pay them off sooner means you will have less money to spend in other areas of your life, such as housing, investing or travel.

If you have a large amount of debt, relatively low income and qualify for loan forgiveness due to your military service, that extra money you would have used on your loans can go to other areas that are important to you. You can reap the rewards for your hard work and sacrifice and use those funds to purchase your dream house or go on a once-in-a-lifetime vacation. You can even launch your own business like I did and be your own boss.

The Bottom Line

While paying off your loans as soon as possible is wise in most cases, it might not make financial sense if you served in the military. Your service uniquely positions you for loan forgiveness through different federal programs, potentially saving you thousands of dollars and allowing you to use your money in other areas of your life.

Of course, it all comes down to the numbers. You can also use prepayment calculator and PSLF calculator to see which path will save you the most money.

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