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Student loans are temporarily paused. Should you make extra student loan payments?
Here’s what you need to know.
Federal student loan payments have been paused this year through a mixture of congressional and presidential action. Congress—through the Cares Act, the $2.2 trillion stimulus package—and President Donald Trump—through executive action—paused federal student loan payments, set interest rates to 0% and halted student loan debt collection. While these measures are temporary, Trump extended this student loan relief through December 31.
Given this student loan relief, you may be asking: “Should I pay off my student loans early?”
Should I pay off student loans early?
If you have any extra cash, the answer is yes. You should pay off student loans early. Here’s why:
- Currently, the interest rate on your federal student loans is 0%.
- This interest rate is temporary. On January 1, 2021, your regular interest rate will resume.
- Since there is no new interest accumulating on your federal student loans, this means that your student loan balance is not growing.
- Every dollar you use to pay off student loans now will first go to pay off any previously accrued interest.
- Then, every remaining dollar will directly pay off your principal balance.
- This is huge because typically, the number one challenge in paying off student loans is that interest accumulates and prevents you from reducing your principal balance.
- So, this is an opportune time to pay off federal student loans because you can lower your student loan balance more easily.
- This can help you pay off student loans early.
If you have private student loans, you can still pay off private student loans early too and save money on interest. However, this student loan relief applies to federal student loans.
How to pay off student loans
There are several ways to pay off student loans faster. When it comes to extra payments, you have two primary options:
- Increase your monthly payment
- Make a one-time, lump-sum payment
It’s possible that you’re not making any federal student loan payments right now. If you don’t have extra cash or are currently unemployed or furloughed, you may want to take advantage of the current student loan relief. You also may be waiting for student loan forgiveness, even if it was cut from the latest stimulus bill. That’s ok too. However, if you have any extra cash—literally any amount—you can make an extra student loan payment. You can pay off student loans early (even if they are paused)—and there is no prepayment penalty.
Increase your monthly payment
If you are making regular monthly payments, you can increase your amount by a constant amount each month.
For example, let’s assume you have $50,000 of student loan debt, an 8% interest rate and a 10-year student loan payment term. If you pay an extra $100 each month, you would save $4,923 and pay off student loans 1.99 years early.
This student loan payoff calculator should you how much you can save.
You can make a one-time, lump-sum extra payment of any amount. If you have extra cash from a bonus, tax refund, inheritance or gift, for example, you can use the proceeds to pay off student loans faster.
For example, let’s assume you have $75,000 of student loan debt, a 7% interest rate and a 10-year student loan payment term. If you make a one-time, lump-sum payment of $5,000, you would save $4,062 and pay off student loans 10 months early.
This lump-sum student loan calculator shows you how much you can save.