Are there penalties for paying off student loans early?
Updated on November 2, 2020
Many students graduate college with debt, and despite securing employment, they struggle to adhere to their monthly loan payments. However, what if you find yourself in a position to pay off your student loans early? Is it a smart idea? Or, will you incur penalties?
Generally, graduates assume that since student loans have strict guidelines in terms of monthly payment amounts and the length of the repayment term, they can’t make early payments. Let’s take a look at this in more detail below:
So, can you pay your debts early?
If you have the money and want to make early payments, you can. There are no penalties associated with paying off student loans early, whether federal or private. Not long ago, lenders could fine borrowers who paid their debts early. However, in 2008, this changed under the Higher Education Opportunity Act.
With the new act, lenders can’t:
• Charge you the full amount of interest your loan would have accrued. Instead, they only charge for the interest accrued while you have the loan.
• Hit you with pre-payment penalties.
When should you pay your student loans off early?
Deciding whether to pay your student loans early or not depends on numerous factors, including your primary financial goal, income, debt, and monthly payments. For instance, if you have credit card debt, it’s wise to pay it off first before moving on to your student loan debt.
This is because credit cards charge higher interest rates than student loan issuers, which can damage your credit score when ignored. Alternatively, if you have a high student loan balance, making consistent monthly payments on time won’t hurt your credit score. On the contrary, it will bring up your credit score.
However, avoid paying off your student loans early if you live from paycheck to paycheck. Additionally, only make early payments when you have an emergency fund with enough money to cover three to six months worth of living expenses.
This way, if you get fired or fall ill and are unable to work, you’ll have money to cover you.
Contact StudentLoanify today to learn more about student loans.