Can I Pay on My Student Loans Before I Need To?

The typical student graduates about $20,000 in debt, so it makes sense to want to pay it off as soon as possible, but this is not always the wisest choice for wealth management. Student loan debt is usually viewed as a beneficial debt to have, because you invest in your education and earnings potential. If you have disposable income, however, it might prove wiser to pay off other debts first -- you may even avoid fines.

Identification

All federal student loans carry no prepayment penalty. You can pay them off at once and the lender will close the account and report it in good standing.

Private student loans often come with loan prepayment penalties because they earn profit from interest. Penalties can equal the amount of interest the bank loses on your advanced payment, and they sometimes charge even more to discourage prepayment.

Considerations

In the United States, lenders almost never charge a prepayment penalty fee to compete with federal loans and other lenders, according to Financial Web. If, for some reason, the lender does include prepayment penalties in your contract, prepaying would also ruin your credit because it is considered a contract violation.

Prepaying Student Loans

Students usually have some of the lowest interest rates of any type of loan, especially federal loans which have a capped interest rate. If you have other debt, such as on a credit card, you would do better making minimum payments on your student loan and tackling the credit card debt and any other loan with a higher interest rate first, suggests MSN MoneyCentral.

Tip

Calculate the interest rate on your student loan and the return on potential investments. If you have student loans at a rate of 4 percent, it would be wiser to put that money into an investment with a rate of return 5 percent or higher. It is not uncommon to see savings accounts that pay a better return than the interest on a federal student loan.

There are downsides to keeping student loans. When shopping for a mortgage, you want a little debt as possible. If your student loans linger, you could damage your credit by missing a payment. Also, having extra income could entice you to live beyond your means. (ref 2)