I Have Enough to Pay My Student Loans Off in a Lump Sum. Should I?

Dylan Blatt on 24 September 2018

Some borrowers have been able to save enough, despite being shacked with loan payments, to now pay off your loan in its entirety. This leads to the natural question: Should I pay off my student loans in a single lump sum payment?

While this is a relatively good problem to be facing as compared to the challenges of many other student borrowers, it is one that can lead to being paralyzed by overthinking and ultimately ending in a non-decision. 

 It would make things easier to say that the smartest thing to do would be make that one huge payment to become debt free, however it is not that simple. This post explores some of the less intuitive blockers that most borrowers have, assuming the lump sum payment is economically feasible.

 The first of these blockers is the lack of an emergency fund. An emergency fund account is different than your general savings account. An emergency fund is a dedicated account that holds about six months of your average expenses. This account is an important cushion to have in the even that you find yourself out of work unexpectedly. This fund is how you can stay afloat during your job search, as well as cover any unexpected expenses such as medical bills or vehicle repairs. 

 Even when being insured for these kinds of expenses, deductibles and non-covered expenses can take a significant chunk out of savings without being able to turn to your emergency fund.

 There is, however, still a happy medium between the full lump sum payment and beginning your emergency fund: Open an emergency fund account and transfer a worthy portion of your savings to your emergency fund. Next, set aside an amount to cover your minimum student loan payments for the next year as an extra cushion. Finally, take what’s left and use it to make a significant payment towards the principal on your loan. This payment will take out a solid portion of interest, as well as help you save on future interest by reducing your repayment term.

 Your new, lower student loan balance will both keep you motivated towards continuing to pay down the principal, while also helping you to refocus on your other financial goals. While this strategy may be less attractive on the surface than knocking out your entire loan balance in one swoop, this is likely the safest approach towards becoming debt free as soon as you can.

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