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Prepayment on federal and private student loans


Deciding where and how to allocate your money is a very personal thing. When it comes to student loans payments, however, it is worth giving thought to the option of prepaying your loan to pay off balances faster. Why? There is no penalty for prepayment on either Federal or private student loans, the Higher Education Act of 1965 ensures it, and what you have to gain is usually worth the effort.  
Options for repaying student loans Prepaying on student loans can mean several different things, and all are worth some consideration depending on your financial circumstances. 
Start paying early Prepayment can mean starting to pay on your Federal and/or bank student loans before the first payment is required. Many student loans have payment plans that begin post graduation. If you end up taking on a job during college and have extra money to allocate toward reducing your student loan debt, you should consider doing it. This will benefit you especially on subsidized loans where student loan rates are not your responsibility until after graduation. Paying early will reduce the overall amount you will be paying interest on and reduce the amount of time it will take till payoff. If you have borrowed with a private student loan, there is a second beneficiary to your early payments - your parents/loan cosigner. After 36 consecutive payments a cosigner release can be signed and they are released from loan obligation on your behalf. It’s a nice way of saying thank you for their willingness to help finance your education.
Making more than the minimum payment Student loan prepayment can also mean simply paying above and beyond the required minimum payment on a monthly basis. When you do this, you want to specify that anything above the minimum payment is applied directly to principal. Doing this will reduce the time it will take you to pay off the loan and the overall interest you pay, regardless of your student loan rates. Paying off federal and private student loans in one lump sum.  If for any reason you come into a windfall of cash, prepayment can be done by paying off the remaining principal in one lump sum. While it might feel nice to have extra cash in your pocket, there is a definite benefit to eliminating student loan debt and avoiding additional interest payments. Once you are debt free, you can invest extra cash into a savings account and start earning on your money rather than accumulating additional debt. 
Use a student loan calculator to understand payment options To get a clear picture of your repayment options and how much you can save based on your student loan rates, consider using a student loan calculator. Here you can enter your student loan data and see potential repayment options for an institution’s private student loans. 
Take advantage of penalty-free prepayment As you are working out your budgets and preparing for the future, consider making prepayment of your student loans part of your plans. Not only will it save you money on your loans, it will help you to create a better financial outlook in the long run. Plus, consistently paying on your loans from an early date will help you to create a positive credit history and improve your borrowing power for the future – a benefit if you choose to borrow again for grad school.
Content was created and provided by RBS Citizens Financial Group.

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