Should You Pay Off Your Student Loan Early?

When it comes time to pay off a student loan, you may think earlier is always better. Most students want to get out from under the debt at the earliest possible date so they can move forward with other life expenses. Unfortunately, you agreed to certain terms when you signed your loan contract, and those terms apply for years after the loan is initially sourced. Depending on the type of loan you have and the terms you agreed to, paying off the loan early may be beneficial or detrimental.

Paying off Federal Student Loans Early

There is no penalty for paying off federal student loans early. This is just one of the key advantages to these low-cost loans, and the benefit is designed so you have a large amount of flexibility in the future. If you find a sudden source of income that allows you to make your loan payments in full, you may want to take the step. The government will report your loans as satisfactorily closed to the credit bureaus, and you will get to walk away free of debt.

Paying off Private Student Loans Early

Private student loans come with more strings attached. There are two main penalties imposed with prepaying a private student loan: fees and credit penalties. The private lender will typically lose money in interest if you prepay your debt. To make up for this loss, the lender will charge you a fee to prepay. The fee may mean you pay the same amount you would if you were to pay the loan according to schedule. However, it is also possible the fee may make your loan more expensive. The lender will also report you to the credit bureaus for breaking your loan contract. This can make your future loans more expensive, resulting in no actual savings over time. 

Other Financial Considerations

Aside from very measurable fees and penalties, there are other financial considerations to make when considering prepaying your loans. It is not always best to fork over a bundle of cash to a lender. In fact, if you take the same sum and invest it, you may find you can make a handsome profit by the time the loan matures. The dividends or profits from the invested funds will work against the interest assessed on the loan. Some borrowers will also want the cash in the near future for other purchases, such as a down payment on a house. 

Alternatives to Prepaying

Instead of prepaying your debt, consider modifying the debt so you can pay the debt off earlier than you were previously scheduled. Contact your student lender to inquire about raising monthly payments. If the lender agrees to the modification, you may find the best of both worlds. You can still be on the fast track to paying off the loan, but you will avoid costly fees and bad credit reports. You will also get to hold on to a large sum of cash for investing or spending on other large purchases. 


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