Like getting a case of the Mondays—but with much higher stakes—the specter of looming student loan debt can be a real buzz kill. As a result, you may be wondering whether it makes sense to start paying off that debt while you’re still in school. Here’s a look at whether it’s possible to pay off loans early and the pros and cons of doing so.
Prepaying Student Loans
You can prepay federal loans and some private student loans without facing penalties. That means that you can direct money toward paying down the principal of your loan at any time, likely without facing extra fees.
Federal student loans typically become due when you graduate after a grace period of six months. This grace period can be extended to three and a half years for active duty military members.
The Parent Loan for Undergraduate Students doesn’t have a grace period and the Perkins loan grace period might vary from school to school.
Private loans might also have a grace period, though these vary depending on the terms and conditions of your loan. You may choose to get a head start on paying off your debt and start making loans payments before you graduate.
Beyond gaining some peace of mind, prepayment may have other benefits. As you pay down your principal you’ll be reducing the amount of money you owe in future interest payments, saving you money over the life of the loan.
Some loans may accrue interest while you’re in school, and these are worth targeting first. Prioritize paying down loans with the highest interest rates. As you pay these off, focus on the next highest rate.
Direct Subsidized Loans do not accrue interest while you’re in school at least half-time. If you pay down the balance while you’re in school, you’ll only be paying off the amount borrowed, essentially securing an interest-free loan for yourself.
Contact your lender when you want to make a prepayment. When you do, include a note that you want the prepayment to go toward paying off the principal of your loan. Otherwise, your lender may treat your payments as though you’re paying your first installment.
But here’s the good news: Federal student loans and private student loans don’t come with prepayment penalties . So you can proceed with paying off your student loans early without incurring prepayment penalty fees.
Other Ways to Manage Your Debt
If your cooktop ramen budget leaves you with little room to prepay your college loans, don’t despair. There are other ways you can make your loans more manageable.
If you carry federal student loans, one option is student loan consolidation, which allows you to bundle your loans through the Direct Consolidation program. This strategy may leave you with a lower rate on your new loan.
The government sets your new rate as a weighted average of all your current loans’ interest rates. So, in some cases, your new rate may actually be higher than your previous lowest rate.
Direct Consolidation loans may qualify you for student loan forgiveness or income-based repayment plans. This can be particularly useful if you plan on going into a field that qualifies for student loan forgiveness such as jobs in the government or some nonprofit sectors.
One note, however: Federal student loan consolidation lets you consolidate federal loans, but doesn’t allow you to consolidate your private loans.
Refinancing Through a Private Lender
If you have a mix of federal and private loans, you may consider refinancing your student loans through a private lender. If this sounds like an option for you, you’ll want to look into a lender that can help you lower your interest rate.
Paying a lower interest rate can save you money in the long term. And if you choose to keep your monthly payment the same, you may even pay off your loans earlier than you would with your original loan.
You can refinance your private loans and some lenders allow you to bundle both federal and private loans. However, be aware that once you’ve refinanced federal and private loans together, you can’t undo the consolidation.
Federal loans that are consolidated in this way are no longer eligible for consolidation under the Direct Consolidation Loan program and, therefore, may lose the potential for loan forgiveness and income base repayment options down the road.
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Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.