Paying back your student loans early is often recommended as one of the best ways to lower your overall debt. But there is some confusion as to whether doing this can attract additional fees. Here’s some clarification on this issue.
Before 2008, private lenders could use their discretion and impose a penalty on early student loan payments. They called it borrowers’ fees. This was done to protect their interests. Luckily for borrowers this no longer the case.
Higher Education Opportunity Act
One of the clauses of the Higher Education Opportunity Act of 2008 has made it illegal to charge any type of additional fees or penalties on early student loan payments. All borrowers now have a right to prepay their loans without being penalized. Fines and penalties may only be applicable if you are late with making your payments.
An important thing to keep in mind when making early payments on your student loan is to specify that the prepayment should be put towards the principle and not the interest. Without specific instructions, all prepayments are automatically put towards the next payment. However, this does not give you any benefit as the interest is still accruing on the principle amount.
When you put the prepayment towards the principle, it reduces the loan amount and in doing so, lowers the accrued interest too.
If your lender does charge you any additional fees on your prepayment, the place to submit a complaint to is the Consumer Financial Protection Bureau.
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