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. Additionally, the plans lay out how many years it will take for you to pay off the loan based on how much you choose to repay per month. But what if you can pay it off earlier than the repayment plan suggests? Should you pay off your student loans early? What if you pay more than the monthly minimum? Are there any penalties? What about any benefits?

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. Thus, there are technically no penalties for paying back your loans early.

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Variable APR from 1.87% – 5.33%
Fixed APR from 2.30% – 5.96%

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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. Interest accrues quickly, and it’s possible that your interest accrues while you’re still in college (depending on the type of loans you have). Imagine what you could do with the thousands of dollars you save if you paid off your loans faster.

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. It’s one less thing to worry about, especially when there are plenty of other financial situations that can happen post-college.

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. The default, at least for federal student loans, is ten years, which is completely fine. Again, make sure that you’re financially comfortable first, and then think about how much you can pay every month. If you can’t comfortably do ten years either, it’s fine to lengthen your loan and make lower monthly payments. Yes, you do end up paying more overall because more interest will accrue. However, the important thing is paying your loan back without defaulting, which means being able to repay every month.


Lender Rates (APR) Eligibility
Earnest company logo.
Variable APR: 1.88% - 5.64%*
Fixed APR: 2.44% - 5.79%*
Undergraduate and Graduate
Lendkey company logo.
Variable APR: 1.90% - 5.25%*
Fixed APR: 2.49% - 7.75%*
Undergraduate, Graduate, Parent PLUS
Credible company logo.
Variable APR: 1.80% - 9.99%*
Fixed APR: 2.15% - 9.99%*
Undergraduate and Graduate
Laurel road company logo.
Variable APR: 1.64% - 5.65%*
Fixed APR: 2.25% - 5.75%*
Undergraduate and Graduate
Commonbond company logo.
Variable APR: 1.96% - 7.02%*
Fixed APR: 2.59% - 6.94%*
Undergraduate, Graduate, Parent PLUS
Fixed APR: 2.44% - 5.97%*
Undergraduate, Graduate, Parent PLUS
VISIT ISL Education Lending
Variable APR: 1.87% – 5.33%**
Fixed APR: 2.30% – 5.96%**
Undergraduate, Graduate, Parent PLUS
VISIT Nelnet
Variable APR: 2.94% - 4.84%*
Fixed APR: 2.99% - 4.94%*
Undergraduate and Graduate
VISIT College Ave
Variable APR: 1.86% - 6.01%*
Fixed APR: 2.47% - 5.99%*
Undergraduate and Graduate, Parent PLUS

*APR includes a 0.25% interest rate reduction for enrollment in automatic payments.

**Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.

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