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All education loans, including federal and private student loans, allow for penalty-free prepayment. This means you can make extra payments to reduce the balance of the loan, or even pay off the entire balance early, without having to pay an extra fee.

When a lender receives payments on a loan, the payment is applied first to late charges and collection costs, then to outstanding interest and then to outstanding principal. Any amount beyond the amount due (e.g., the late charges and collection costs and the monthly installment as specified in the repayment schedule) is considered a prepayment.

Why Prepay?

Prepayment can save you money by paying off your loan earlier and by reducing the total interest paid over the lifetime of the loan. Since the loan balance is reduced, more of your subsequent monthly payments will go toward further reducing the loan balance and less toward interest.

When you have more than one loan, you should apply prepayments toward the more expensive loans first (the loans with the highest after-tax interest rates). This strategy will save you the most money.

FinAid has a prepayment calculator which you can use to calculate the impact of different prepayment strategies on your loans. It shows the reduction in the loan term and the total interest saved.

How to Request Prepayment

Federal regulations allow the lender to apply a prepayment to "future installments by advancing the next payment due date" unless otherwise specified by the borrower.2 For this reason it is important to include a note with any prepayment indicating that you want the prepayment applied to reduce the principal balance of the loan. Otherwise, the lender will treat it as though you had paid your next installment(s) early, and may delay the next payment due date(s) as appropriate.

This is especially true during periods of deferment (including in-school and grace periods) and forbearance when interest is accruing but not yet capitalized. Likewise, for loans in the income contingent repayment program, where the interest is not capitalized after it exceeds ten percent of the original principal amount.3 It is always better to have prepayments used to reduce the loan balance, since this will cost you less over the lifetime of the loan.

Due to the way the income-contingent and income-based repayment plans treat interest, it is not advisable to prepay a loan in the income-contingent and income-based repayment plans.

If you have several loans with the same lender, you may wish to specify that the extra payment be applied to a specific loan. Generally, if the extra payment is applied to the highest cost loan (e.g., the one with the highest interest rate) you will save the most money. If you do not specify how the extra payment should be applied to your loans, the lender may apply it to the lowest cost loan or uniformly to all your loans.


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