Unlike investing, your rate of return is guaranteed: It's equal to the interest rate on your loans. If you owe $1,000 at 10 percent, paying it off today instead of over the next 12 months means you'll save about $100 (before inflation). You'll also free up the monthly cash flow that was going toward your loan payments.
Both federal and private student loans fall off your credit report about seven years after your last payment or date of default. You default after nine months of nonpayment for federal student loans, and you're not in deferment or forbearance.
Most lenders offer student loan borrowers the option of making biweekly payments instead of monthly payments. And there are significant benefits to doing so: You'll pay off your loans faster and save hundreds of dollars in interest payments. Given how prevalent student loan debt is, extra payments can go a long way.
"In many cases, paying off a personal loan early will save the borrower money in interest," says Thomas Nitzsche, senior director of media and brand at Money Management International, a nonprofit credit counseling agency. With loan payments out of the way, you free up money to pad your monthly budget.
Yes. You can make payments before they are due or pay more than the amount due each month. Paying more than your required monthly payment can reduce the amount of interest you pay, and total loan cost over the life of the loan. Was this page helpful?
Which Student Loans Should You Pay First: Subsidized or Unsubsidized? It's a good idea to start paying back unsubsidized student loans first since you'll likely have a higher balance that accrues interest much faster. Once your grace period is over, even subsidized loans will start accruing interest.
Borrowers can choose from four types of federal student loan repayment plans. But the best one for you will likely be the standard repayment plan or an income-driven repayment plan, depending on your goals. Standard repayment lasts 10 years and is the best one to stick with to pay less in interest over time.
At what age do student loans get written off? There is no specific age when students get their loans written off in the United States, but federal undergraduate loans are forgiven after 20 years, and federal graduate school loans are forgiven after 25 years.
If you work full time for a government or nonprofit organization, you may qualify for forgiveness of the entire remaining balance of your Direct Loans after you've made 120 qualifying payments—i.e., at least 10 years of payments. To benefit from PSLF, you need to repay your federal student loans under an IDR plan.
Getting ahead of your debt is generally a smart move; however, if it comes at the cost of avoiding other debt, or overshadowing other benefits you may be receiving, it could set you back in the long run.
Paying Off Your Loan Early
You may prepay all or part of your federal student loan at any time without penalty. Any extra amount you pay in addition to your regular required monthly payment is applied to any outstanding interest before being applied to your outstanding principal balance.
If your loan interest rates are low and fixed, you may want to prioritize saving over paying off your loans. On the other hand if your loans are high-interest, or you don't have a plan to get a good return on your savings, paying off your loans may make more sense.
For most borrowers, the interest on their loans keeps them in debt for longer. By paying off your loans all at once or making a large payment, you can save money on interest in the long run. The savings could be significant depending on your loan balance and monthly payment.
If you qualify for subsidized loans, use them first. They are your cheapest option, since the government pays the interest while you're in school.
Paying a little extra each month can reduce the interest you pay and reduce your total cost of your loan over time. Continue to make monthly payments even if you've satisfied future payments, and you'll pay off your loan faster.
Income-driven repayment (IDR) plans can often provide a lower monthly payment because they are based on your income and family size.
Option 2: The “smallest debt first” strategy
The snowball method works because paying off a debt in full incentivizes you to keep working toward your goal. As you pay off your smaller debts, you'll have more money to put toward your larger debts.
Paying off student loans early can benefit you financially, but it should typically come second to building your emergency fund and retirement savings. People with private student loans or without other debt tend to benefit more from paying off student loans early.
When you make a lump-sum payment on your mortgage, your lender usually applies it to your principal. In other words, your mortgage balance will go down, but your payment amount and due dates won't change.
Student Loan Interest Deduction
You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.