Do Student Loans Have Prepayment Penalties?

By Cece Gilmore

Cece Gilmore is a Content Writer Intern at Scholarships360. Cece is an undergraduate student at Arizona State University pursuing a degree in Journalism and Mass Communications. While at ASU, she has become the Education Editor as well as a published staff reporter at Downtown Devil. Cece is also the co-host of her own radio show on Blaze Radio ASU. Full Bio

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Maria Geiger is Director of Content at Scholarships360. She is a former online educational technology instructor and adjunct writing instructor. In addition to education reform, Maria’s interests include viewpoint diversity, blended/flipped learning, digital communication, and integrating media/web tools into the curriculum to better facilitate student engagement. Maria earned both a B.A. and an M.A. in English Literature from Monmouth University, an M. Ed. in Education from Monmouth University, and a Virtual Online Teaching Certificate (VOLT) from the University of Pennsylvania. Full Bio

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Posted: March 6th, 2023

While paying back student loans can be a challenging time for many students, some students are able to pay off their student loans early.  These students may wonder if there is a prepayment penalty student loan fee. The good news is that the answer is no! Keep reading below for some helpful information about student loan prepayment! 

What is a prepayment penalty?

Prepayment penalties are financial fees for paying off a loan early. Prepayment penalties were designed to make banks money because if an individual pays off their loan early, the bank loses out on interest charges. 

Do student loans have prepayment penalties?

No! Neither federal nor private student loans have prepayment penalties. Prepayment penalties typically apply to other types of loans, such as a mortgage. This is in thanks to the Higher Education Opportunity Act of 1965 which states students who take out a loan may “accelerate without penalty repayment of the whole or any part of the loan.” In 2008, the Higher Education Opportunity Act was revised to allow the prepayment of private student loans without a penalty. 

Should you pay off your student loans early?

Even though there is no prepayment penalty for student loans, it begs the question of whether you should pay off your student loans early. Let’s take a look at factors to consider when thinking about paying off your student loans.

Essential living expenses

The first and primary goal when paying off your student loans is to ensure that there is enough money left over to cover essential living expenses. Therefore, if you only have enough money to prepay your student loans, but cannot afford to pay for other expenses, it may not be worth it to prepay your student loans at that time. 

Existing loan obligations

Another factor that is important to consider is any other debts or loans you may have that should be prioritized over your student loans. Student loans usually do not have as high of interest as other types of loans or debt (such as credit cards). Therefore, you should prioritize the higher interest loans or debt you may have over student loans. 

Also see: Top grants to pay off your student loans

Pros of prepaying off student loans early

• You will save money by paying less interest over the life of the loan
• Being free from student loan debt can allow you to focus on other financial goals
• It will become less stressful managing other loans 

Cons of prepaying off student loans early

• You could lose out on a loan forgiveness program, especially if you work in the public sector
• Your budget may have to be stricter than if you paid off your student loans later
• You may not be able to reach your other financial goals as fast 

Tips for paying off student loans quickly

Pay off more than the minimum due

If possible, pay off more than the minimum amount needed per month. This can be as little as $20 extra per month to help you chip away at your loan faster.

Pick up a part-time job

Extra income from a part-time job can help pay down your loans. Having an extra source of income allows you to put more money towards your loans without having to sacrifice other financial necessities. 

Refinance your student loans 

If you qualify for a lower interest rate, you can refinance your student loans which helps lower your monthly payment. However it is important to note that if you refinance a federal student loan into a private loan, you will lose access to federal benefits. This includes the possibility of forgiveness, flexible repayment plans, and the option to defer your loans.

Further reading: How to consolidate and refinance student loans 

Key Takeaways

• There are no prepayment penalties for either federal or private student loans 
• Prepaying your student loans should only occur if you have the financial flexibility to do so and if all other loans and debts are paid off first
• Prepaying student loans allows borrowers to pay less interest over the life of their loans