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Plan Well, Retire Well

Saving and investing your money
Cut loan cost

Cut the Cost of Student Loans


Recently a friend asked me, "Could she pay back her student loan more quickly and avoid some of the interest charges?" This is a great question! The answer is yes; most federal and private loans allow people to pre-pay their loans without penalty.

Illinois students who borrow money for their undergraduate degrees average $28,984 in student loans upon graduation, according to the Project on Student Debt. But the real cost of these loans is based on several factors including how long it takes to pay off the loan.

For example, if a person pays for this loan (with an interest rate of 4.29%) in 10 years, it will cost a total of $35,712 for principle plus interest.

However, if the person qualifies for an income-based repayment plan and takes 25 years to pay off this loan, the overall cost could be over $50,000 (assuming a salary of $20,000 and over $5000 of loan forgiveness).

To see how the numbers work for your situation, go to the Federal Student Aid calculator.

Looking at our example again, the $28,984 loan balance paid back in three years (a common loan period for car loans) would cost $30,941. Of course, the monthly payments are more. However, this can be a very good strategy for some people. Try an easy-to-use calculator that allows you to easily change the repayment time frame.

If this sounds appealing to you, double-check that there aren't any prepayment penalties for your student loans. Also, because of the way income-based payment plans are calculated, this may not be a good choice in some situations. For more information on this topic see, Income Driven Repayment Plans: Frequently Asked Questions (especially question 47).

To cut the cost of student loans, you may want to explore:

  • making extra payments,
  • increasing the amount you pay each month,
  • or even paying off your entire loan balance early.

Extra money received will be used first to pay any late charges and collection costs, and then outstanding interest, if these expenses exist. Otherwise payments will go towards paying down the loan principle (the amount borrowed).

Communicate in writing with your lender. Tell them that you want extra money paid to go towards the loan with the highest interest rates. If you don't, the money may be used for a low-interest loan or be divided equally among all outstanding loans.

Like all loans, it's worth taking the time to consider whether or not you want to prepay a student loan and save on interest costs, given other factors and expenses in your life. Only you can decide what the best choice is for you!



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