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Sometimes, borrowers who have student loans may be able to put extra money toward their monthly loan payments, and pay off their loans early.

If you are one of the fortunate few, and can afford to pay off your student loan debt early, you’ll pay less interest and be in a better position to pursue other goals, like buying a home or starting a business. But just because you can pay off debt early, doesn’t always mean that you should. Or at least, not until you make sure you’re properly informed.

  1. You will not get hit with prepayment fees if you pay off your student loans early

When you pay more in a month than your required monthly payment, this extra payment is typically considered an early payment – it goes towards your next monthly payment so that you get ahead on your payment schedule.

Ideally when you prepay, you should ask your lender to put this extra money towards your loan’s principal in order to pay down the actual loan while reducing the amount of interest being accrued.

It used to be the case that private lenders could charge borrowers fees for prepaying student loans. But this is no longer true — the Higher Education Opportunity Act of 2008 states that a borrower has the right to prepay his or her loans, at any time, without penalty. 

Keep in mind that this law applies not only to prepayment fees, but to penalties of any sort. This means that lenders cannot charge you the full amount of interest on your loan if you pay off your loans early — you are only legally responsible for the interest that accrues while your loans are still pending. One of the primary benefits of paying off your loans early is that you save on the interest payments you would otherwise owe — so if you pay the full amount of interest, it would be as if you hadn’t prepaid your loans at all!

If you believe you are facing unlawful treatment at the hands of your lender, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB).

If you’re considering prepaying your loans, you can calculate how much it would save you by using this prepayment calculator before contacting your lender.

2. Don’t rush to pay off your debt, even if you have the money to do so

Say you have some extra cash coming in that could help you pay off your student loan debt earlier — should you? Prepayment can be a great idea, as long as you do some budget management before writing that bigger check.

First, make sure you put aside enough money to cover your of living expenses, such as rent, groceries, and other bills, for a couple of months. You should also consider whether a part of that money would be better put toward retirement savings or other debt, like a credit card payment or mortgage.

3. Do your research and have a strategy

Borrowers often have a number of loans, both federal and private, that come with different interest rates. In order to prepay your loans effectively, you should devise a strategy.

Generally speaking, it’s best to try to pay off the loans with the highest rates of interest first, as this will help you eliminate your total debt faster. If you have a combination of federal and private loans, you should try and pay off your private loans first, especially if your private loans have variable interest rates.

This is because federal loans usually come with protections —  like loan forgiveness and income-driven repayment plans — that help borrowers keep their heads above water.

Another decision to make is how you would like to tackle prepayment: would you rather pay a little extra each month, or make a lump-sum prepayment (which could be a good use for your income tax refund)?

4. Communicate your strategy to your loan provider

So you’ve got your prepayment strategy in place — now it’s time to talk to your loan providers. Prepayment involves more than simply paying more each month. It’s imperative that you find out how your loan provider treats extra payments first.

For example, will your provider simply treat your extra payment as an early payment on your next bill? This will not actually help you get rid of your debt ahead of time. Other loan providers may divide the extra amount evenly between all your various loans; again, this will not help you eliminate your debt ahead of schedule.

To avoid any rude surprises, be sure to speak to your loan provider before you start making extra payments, and be clear about how you would like the extra money to be used. While some loan servicers allow you to specify online where you would like extra payments to go, others require a written letter of intent along with a separate cheque for the additional amount. Whatever you do, make sure you keep a copy of all your correspondence with your loan provider for your records.

Remember, a little extra cash can go a long way toward helping you eliminate your student loan debt — just as long as you do the work involved to verify that your prepayments are helping you, and not hurting you instead.

Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit scores.