Are There Penalties to Paying Off Student Loans Early?

Student loans, both private and federal, have very specific repayment plans attached to them. These plans outline interest rates, monthly payment amounts, strict terms and conditions, and estimates on how long it’ll take to repay the loan.

But what if you can pay it off earlier than the repayment plan suggests? What if you pay more than the monthly minimum? Are there any ramifications?

No More Prepayment Penalties

Once upon a time, loan companies could fine borrowers that paid off their debts early. However, that all changed with the Higher Education Opportunity Act of 2008. The Act ensured that student borrowers would not be penalized for paying off their loans earlier than expected. Lenders can’t hit you with prepayment penalties, or charge you the full amount of interest your loan would have accrued—you’re only charged for the interest that accrues while you have the loan.

Benefits of Repaying Your Loans Early

The biggest benefit of prepaying your loan is saving money on the interest rate accrual. Without all those extra months/years of compounding interest, you can save thousands.

Of course, being debt free in general is fabulous too. Then you can focus on saving money (or spending money) on other things like a house or a new car, and not worry about student loans hanging over your head.

Drawbacks of Repaying Your Loans Early

Of course, in order to prepay you have to have a steady and significant income. You’ve likely already created a budget that goes along with your repayment plan, so if you want to prepay you’ll have to crunch some more numbers, and likely make a sacrifice or two, in order to make things work.

Prepayment may not be the best option for borrowers who can’t handle a higher monthly payment amount—such as those living paycheck to paycheck. Slow and steady can work for many.

Allison Wignall

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