What are the penalties for early payment?

There are no prepayment penalties on federal student loans. Borrowers may make extra payments on their student loans or pay them off in-full without having to pay a fee or other penalty.

To make a payment, contact the loan’s servicer. Borrowers can find their servicer using the student access portal to the National Student Loan Data System (NSLDS) at www.nslds.ed.gov. To log in to NSLDS, the borrower will need to supply his or her Social Security number, date of birth and Federal Student Aid PIN.

Subsidized Federal Stafford Loans do not accrue any interest while the student is in school, so if the borrower pays off the balance in full before graduation, the borrower will repay just the amount borrowed, plus the loan fees.

Most students wait until they are finished with school to begin making payments. There are never any penalties for paying more than the required monthly payment amount. Paying extra each month (or making an extra payment per year) will pay off the loan off sooner and therefore reduce the total interest that would have accrued.

For example, a $12,000 loan with a 3.86% interest rate would normally be repaid in 10 years at $120.70 per month. Total interest paid over the life of the loan is about $2,484. If the borrower pays an extra $100 per month (a total of $220.70 per month), the loan will be repaid in full in five years. The total interest paid will be about $1,212, saving about $1,272 over the life of the loan.

When making an extra payment, include a letter telling the servicer to apply the extra payment to the principal balance of the loan. Otherwise, the servicer will use the extra payment to accelerate the next payment. If the borrower is signed up for auto-debit, this could cause the servicer to skip the next payment.

Also, if a borrower has more than one loan with the servicer, tell the servicer which loan should receive the extra payment. Generally, a borrower will save the most money if the prepayment is applied to the loan with the highest interest rate first. It is also a good idea to specify the loan id on the check. If the borrower does not specify which loan should receive the prepayment, the servicer will choose. Some will choose the loan with the next due date. Some will choose the loan with the lowest interest rate. Some will apply the extra payment to all the loans, dividing it evenly among them.