Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
A student loan payoff letter may be needed to get a mortgage, refinance your student loans, or acquire other forms of debt. While the name implies you’ve paid off the loan, a student loan payoff letter actually just shows the details of your student loan — including the payoff amount and monthly dues.
Some people may want or need to take out more than one loan at the same time. For those who took out student loans for college, a student loan payoff letter may come into play. In this guide, we’ll run through what these letters are and some of the commonly navigated twists in understanding their use in managing loans.
What Is a Student Loan Payoff Letter?
Despite what it sounds like, a student loan payoff letter is not a document proving a student loan has been paid in full. Rather, it’s a document generated by the loan servicer stating the current loan balance, monthly payments, and other account information.
Note that a loan payoff letter is not the same thing as a monthly statement. It’s a tool for other lending institutions to weigh how a borrower manages debt on an existing loan that also forecasts future interest costs based on when the loan is due to be repaid.
There is generally a time limit placed on payoff letters — a “good-through date” — after which the amount of interest due on the loan would change.
A student loan payoff letter may be needed when the borrower is still paying off student debt and also applying for a mortgage, refinancing an existing loan, or when they’re planning to pay off the loan.
The payoff letter will play a part in determining an applicant’s debt-to-income (DTI) ratio, which many lenders look at to determine whether the applicant can afford potential future payments on a loan.
A high student loan balance, in relation to income, could limit a person’s loan options. So, it pays to pay your debt down as much as you can.
Getting a Student Loan Payoff Letter
A loan payoff letter can be requested from the lender at any stage of a loan’s term, whether the borrower hasn’t made an initial payment or they’re close to making their last. Obtaining a loan payoff letter can be done by contacting the lender and simply requesting it.
Lenders’ websites may have an option for requesting these letters via an online form. If that option isn’t available, the borrower may need to call the lender’s customer service line to request the letter.
There may be a fee charged for requesting a payoff letter. If there is one, it should be explained in the loan agreement. The lender’s customer service representative should also be able to verify whether there is a fee for the letter.
Managing Student Loans
An important factor in determining a student loan payoff strategy is figuring out when the first payment is due, information which the loan servicer will provide.
According to the Federal Student Aid Office, “For most federal student loans, there is a set period of time after you graduate, leave school, or drop below half-time enrollment before you must begin making payments.”
This period of time, known as a grace period, could last anywhere from six to nine months depending on which type of federal student loan a borrower has. It may help to think ahead about how best to take advantage of the grace period in advance.
While it might be tempting to view the grace period as a time to sink extra money into things you want or need, borrowers may want to consider instead saving up for when student loan payments will start coming due.
Interest on Direct Subsidized Loans is paid by the U.S. Department of Education while the borrower is in school at least half-time, during the grace period, or a deferment period—a factor that might make paying the loan off, in the long run, a little less burdensome.
Borrowers of Direct Unsubsidized Loans are responsible for paying interest during the entire term of the loan. Interest accrues from the time the loan is disbursed to the borrower.
Strategies for paying off student loans quickly may include looking into ways to make money outside your day job, asking if there is a student loan repayment program at your company, and paying down other debt during the grace period.
Selecting the Right Repayment Plan
Several student loan repayment options are available for eligible borrowers of federal student loans depending on the type of loan.
Standard Repayment Plan
For Federal Direct Loans and Federal Family Education Loans (FFEL), the loan servicer will automatically place borrowers on the Standard Repayment Plan unless they choose a different repayment plan.
The Standard Repayment Plan gives the borrower up to 10 years (between 10 and 30 years for consolidation loans) to repay, with fixed monthly payments of at least $50 during that time. This repayment plan may not be the best option for borrowers who are considering seeking Public Service Loan Forgiveness (PSLF).
Graduated Repayment Plan
Eligible Direct Loan and FFEL borrowers who expect their income to increase gradually over time may opt for a Graduated Repayment Plan. This plan has the same 10-year term (between 10 and 30 years for consolidation loans) that the Standard Repayment Plan does, but the payment amount differs.
Monthly payments start low and increase every two years, will always be at least the amount of accrued interest since the last payment, and will be limited to no more than three times the amount of any previous payment.
Extended Repayment Plan
Borrowers who need to make lower monthly payments over an extended time may want to consider the Extended Repayment Plan, which allows for a 25-year repayment term. This plan is for eligible Direct or FFEL borrowers who have outstanding loan balances of $30,000 or more on each loan.
Monthly payments on this plan can be either fixed or graduated and are generally lower than those made under the Standard or Graduated plans. However, you should expect to pay more in interest over the life of the loan.
Income-Driven Repayment Plans
There are a few options for borrowers who might be having trouble making their payments. Income-driven repayment (IDR) plans allow eligible borrowers to responsibly manage their debt while remaining on track to pay it off.
The plans take into account a borrower’s income, discretionary income, family size, and/or eligible federal student loan balance. Borrowers under an IDR must recertify their income and family size each year or risk losing their eligibility for the plan.
The Takeaway
A student loan payoff letter details the specifics of your student loan, including the amount you owe, your monthly payments, and the payoff amount. A student loan payoff letter may be needed to secure a mortgage, refinance your existing debt, or acquire another form of debt, such as a personal loan.
Choosing to refinance student loans may be an option for some borrowers looking to lower their monthly payment or reduce the total amount they pay in interest. If you choose to lower your monthly payment, you’ll often have to extend your loan term, which will result in paying more in interest over the life of the loan. If you shorten your loan term and reduce your interest rate, you most likely will save money in interest.
Keep in mind that refinancing federal student loans into a private student loan means forfeiting all federal loan benefits, including income-driven repayment plans and student loan forgiveness. Borrowers are encouraged to look at all options before making a decision.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. 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 or extended repayment plans.
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