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Student Loans: Should You Pay Them Off Early?

Student Loans: Should You Pay Them Off Early?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated November 14, 2024
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Paying off student loans early may benefit some borrowers. Federal and private student loans typically charge interest, but making extra payments toward student loan debt can minimize your interest costs and bring you closer to achieving financial freedom.There are no prepayment penalties for paying off student loans early, including federal and private student loans. A 2008 federal law, the Higher Education Opportunity Act, amended the Truth in Lending Act to ban private lenders from imposing early repayment fees on private education loans.The U.S. Department of Education imposes no prepayment penalties if you repay your federal student loans in full ahead of schedule. However, paying off student loans early may deplete your savings, so it may not be right for you depending on your circumstances.

Guide to Paying Off Student Loans Early

Some people opt to pay off their student loans early to minimize their interest costs. Paying off your student loans early means you repay your student loan debt ahead of schedule. For example, borrowers with a 10-year student loan repayment plan may minimize their interest costs if they repay their student loans within five years — or five years early.Student loans generally feature monthly payments that go toward principal and interest charges. Borrowers may pay off their student loans early by making extra payments above the required monthly payment amount. This can be a series of extra payments or even one large payment toward your outstanding balance. There’s no penalty if you repay your student loans ahead of schedule.Some borrowers, however, may lack the means to make extra payments. Making extra payments is not necessarily wise if it depletes your savings. Some may ask, how long does it take to pay off student loans? Some borrowers may take 10 to 30 years to pay off federal student loans and five to 25 years to pay off private student loans.Here are some other points to keep in mind:
  • Federal student loans are discharged if a borrower has unpaid federal student loan debt and dies
  • Some private lenders may demand repayment from your estate if you die with outstanding private student loan debt
  • You may pay off student loans on schedule with minimum payments 
Recommended: What Happens to Student Loans When You Die?

Do Student Loans Have Prepayment Penalties?

There are no prepayment penalties for paying off student loans early, whether it is federal and private student loans.As mentioned earlier, the Higher Education Opportunity Act amended the Truth in Lending Act to ban private lenders from imposing early repayment fees on private education loans. Meanwhile, the U.S. Department of Education imposes no prepayment penalties if you repay your federal student loans in full ahead of schedule. Some consumer lending products, such as car loans, may feature prepayment penalties. But federal student loans and private student loans do not charge early repayment fees.Recommended: What Are the Penalties for Paying Off a Car Loan Early?

When Is It a Good Time to Pay Off Student Loans Early?

Here are times when it might be good for you to pay off student loans early:

You’ve Saved a Lot for Retirement Already

If you’re already saving a lot for retirement and have extra discretionary income to spend, this might be a good time for you to pay off your student loans early. Vanquishing student debt faster than scheduled may help you achieve financial freedom sooner rather than later.

Your Income Is High Enough to Afford Other Goals

If your income is high enough to afford other goals, this might be a good time for you to pay off your student loans early. You can minimize your interest costs by making early repayments.

You Paid Off All High-Interest Debt

If you have paid off high-interest debt on other accounts, this might be a good time for you to pay off your student loans early. Eliminating other debts can free up your budget and empower you to make extra payments toward student loan obligations.

Your Emergency Fund Is Full

If your emergency fund is full, this might be a good time for you to pay off your student loans early. Prepaying your student loans may minimize your interest charges and improve your debt-to-income ratio. Your debt-to-income ratio, also known as DTI, measures your ability to afford new debt without defaulting on your existing obligations.

Pros of Paying Off Student Loans Early

Here are some of the pros of paying off student loans early:

Minimizes Interest Costs

As mentioned above, paying education loans off ahead of schedule may minimize your interest costs. That’s because making early and extra repayments ahead of the loan repayment schedule can reduce the amount of interest charges you face during your period of indebtedness.

Improves Debt-to-Income Ratio

Paying off your student loans early can improve your debt-to-income ratio. As mentioned earlier, DTI measures your ability to afford new debt without defaulting on your existing obligations. Most lenders like to see a DTI below 36%. Paying off your student loans in full sooner rather than later can expedite your path of having no more student loan monthly debt payments to make.

Promotes Financial Freedom

Paying off your student loans early can eliminate your student debt obligations well ahead of your loan repayment schedule, which can bring you closer to financial freedom. Your discretionary spending power may increase if you no longer have to make student loan payments on a monthly basis.

No Prepayment Penalties

Again, there are no prepayment penalties for paying off student loans early. The U.S. Department of Education does not impose prepayment penalties on borrowers who make early repayments on federal student loans, and federal law prohibits private lenders from imposing prepayment fees on private student loans.Paying off student loans early may benefit some borrowers. Federal and private student loans typically charge interest, but making extra payments toward student loan debt can minimize your interest costs and bring you closer to achieving financial freedom.

Cons of Paying Off Student Loans Early

Here are some of the cons of paying off student loans early:

Can Deplete Personal Savings

Paying off your student loans early can deplete your personal savings. The average federal student loan debt in 2024 is more than $37,853, according to the Education Data Initiative. Paying off your student loan debt obligations sooner rather than later may deplete your bank account savings and impact the amount of interest you can earn on deposits.

May Impact Student Loan Interest Deduction

Paying off your student loans early can impact your ability to claim a student loan interest deduction. The student loan interest deduction allows eligible taxpayers who have paid interest on a qualified student loan to claim a deduction on their federal income taxes. The student loan interest deduction is a tax break that can reduce your taxable income by up to $2,500 during an annual tax period.

Can Impact Your Ability to Make Other Investments

Paying off your student loans early can impact your ability to make other investments. Putting your money in this area can diminish your ability to invest in others. Spending your discretionary income on extra student loan repayments may not be the best personal finance strategy for you.

How Refinancing Can Help You Pay Off Your Student Loans

Student loan refinancing in some cases may provide borrowers with a lower interest rate or lower monthly payment. (Lowering your monthly payment by extending your loan term could increase your total interest costs.)Student loans can be federal or private, and borrowers may refinance both. The difference between private and federal student loans is that federal student loans are provided or guaranteed by the federal government, whereas banks, credit unions, online lenders, and select state-based or state-affiliated organizations may offer private student loans.Refinancing federal student loans can allow borrowers to replace their existing federal loans with the terms and conditions of a private loan agreement.To refinance your student loans, you may submit a student loan refinancing application with a private lender and see whether you qualify.Recommended: How Does Student Loan Refinancing Work?

Pros and Cons of Refinancing

One of the advantages of refinancing student loans is it may provide you with a lower monthly payment, although lowering your monthly payment by extending your loan term could increase your total interest costs.One of the big disadvantages of refinancing student loans with a private lender is you’ll be forfeiting federal benefits, including income-driven repayment plans and federal student loan forgiveness programs like Teacher Loan Forgiveness.Private lenders can set their own underwriting standards for student loan refinancing, but some may require applicants to have steady income and good credit to qualify. For subprime borrowers, it might be difficult to refinance student loans with bad credit.Borrowers can refinance while still in school, but refinancing before you complete your degree or certificate program may not be right for you. In the end, your personal circumstances may dictate whether student loan refinancing is right for you.

The Takeaway

Prepaying student loans may not be right for you if it depletes your savings and makes it harder for you to achieve your goals. Making minimum payments each month is an option you may consider. If you have student debt and need a lower monthly payment, Lantern by SoFi can help. Just fill out a simple form and refinance student loans with a lender of your choice. (Refinancing for a longer term and lower monthly payment may increase your total interest costs.)Lantern can help you explore student loan refinance options.

Frequently Asked Questions

Is it better to pay off student loans in full?
Does paying student loans early help your credit score?
What happens if you pay off your student loans all at one time?
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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