Question: I was wondering if I can start paying off a student loan before graduation? My daughter is currently a college junior and has a student loan. I’d like to begin paying on the loan before she graduates. Any information would be helpful.
Paying on student loans before college graduation is a great idea. This will help to eliminate her student loan debt total and lighten the financial impact of paying for student loans after graduation.
Unfortunately, many students do not take these payments into account when planning their post-grad, new-career professional budget. Some students are shocked at the monthly payment totals of their repayment plans.
If she has any federal student loans via the Direct Loan Program, she will have a grace period before she’ll be required to begin paying back her loan balance. According to StudentAid.Gov, this grace period is generally six months. For a Perkins loan, the grace period is nine months.
Why Paying Back Your Federal Student Loans Before Graduation Is a Good Idea
The sooner you can begin to pay back these loans the better. While the Federal Direct Loans have a fixed rate (currently these are at historic 0% interest rates), you can begin to tackle repayment earlier. This will cut your overall loan cost, and help you pay off your loan faster.
There are many reasons why beginning to pay back your student loans before graduation is a good idea.
There is no penalty for pre-paying these loans. You won’t face any extra charges for starting your repayment before you graduate college.
If you have not graduated, your Direct Subsidized Loans are not accruing interest. It’s important to note that the federal government pays the interest for your Direct Subsidized loans while you’re in college or in deferment. If you have an Unsubsidized Loan, interest builds as soon as your daughter has taken out the loan.
Paying on your Direct Subsidized loan now allows you to apply more money to your loan principal. Student Aid adds that once your federal loan goes into repayment status, you will not have the option to apply money directly to your principal until all outstanding interest has been paid.
If you can begin paying on your federal student loan now, you should before you graduate college and your grace period ends. After this, your student loan interest will begin to build.
While you’re not accruing interest now as a current college student, the zero percent interest rate will not last. Currently, the interest rate is set to zero through September 30, 2021. After the emergency COVID-19 loan rates revert to their original status, an undergraduate borrower of Direct Subsidized loans and Unsubsidized loans can expect interest rates of 2.75% (this is for loans first disbursed on or after July 1, 2020, and before July 1, 2021).
She may qualify for student loan forgiveness earlier in her career than most. Unfortunately, many students are not aware of the Student Loan Forgiveness program. If she happens to get a full-time government or not-for-profit jobs after college graduation, she’s eligible.
StudentAid.org mentions, “…you may qualify for forgiveness of the entire remaining balance of your Direct Loans after you’ve made 120 qualifying payments—that is, 10 years of payments.” There are many eligibility factors that determine how and if you will qualify for loan forgiveness. If you begin to pay on these loans early, it’s worth checking with your education loan provider to see if your early payments qualify for this program.
If she has a private loan, be sure to reach out to the provider to see if there’s a penalty for pre-payment. Most private student loans have variable interest rates; you should consider beginning paying on these as soon as you can.
If you have taken out a Direct PLUS Loan to help your daughter pay for school, your first payment is due as soon as the loan is disbursed. In some cases, you can apply for a Direct PLUS Loan deferment, however, interest will accrue. It’s a smart idea to make at least the interest payments during the deferment period. Interest rates on this type of loan are generally higher than other federal student loans.
How to Start Making Student Loan Payments Now
The U.S. Department of Education uses several loan servicers for Federal Direct Loans. Your first step is to find out the servicer of her loan. If you do not know who the servicer is, visit the National Student Loan Data System (NSLDS). From here, your daughter can log in to find the loan servicer for each of her federal student loans.
A few of these Department of Education loan servicers include:
- Great Lakes Educational Loan Services, Inc.
You can find a comprehensive list of these lenders on studentaid.gov.
If she has a Federal Perkins Loan, she should check with her school’s financial aid office to find out the loan service provider her college uses.
If you’re looking for other ways to pay for school such as scholarships, Fastweb.com is a helpful resource. Check out their National Scholarship Directory. Sign up to find scholarships that fit her, too.
Considering Grad School? Check out our best graduate student loans.