Private Student Loan Prepayment Penalties

One of the best things you can do for private student loans, or any student loans for that matter is to make prepayments. Both types of student loans (federal and private student loans) should let you make penalty-free prepayments. Students may at first have some concerns about making prepayments to their private student loans for fear of a prepayment penalty, but according to the Truth in Lending Act, private student loan lenders must let you make prepayments to your private student loans without penalty. For those unaware of what a private student loan prepayment is, it’s simply making an extra payment (above the monthly installment as specified in the private loan repayment schedule) to reduce the balance of the loan, or even the entire balance. When the lender receives the prepayment for your student loans, the payment will be allocated in the following order:

1. Payment will first go towards any late charges and/or outstanding interest.

2. Payment will next go towards the monthly installment as specified in the private loan repayment schedule.

3. After the 2 steps above, any money left over is considered a prepayment (which gets directed towards the loans principal balance) for your private student loans.

The reasons why making prepayments on your private student loans are beneficial:

a.) Saves you money by paying off your private student loans earlier and by reducing the total interest paid over the lifetime of the loans.

b.) Because prepayments reduce the loan balance, more of your subsequent monthly payments will go toward reducing the loan further, and less will go towards interest.

Important Tips for Private Student Loan Prepayment:

1. If you have more than one private student loan, always apply prepayments toward the most expensive loan first (highest interest rate).

2. If you have credit card debt, you should reconsider prepayment on your private student loans, and apply that money towards first reducing your credit card debt (since credit cards typically have higher interest rates the private student loans).

3. PAY CLOSE ATTENTION TO THIS LAST TIP! Always include a note with any private student loan prepayment. The note should state that you want the prepayment applied to reduce the principal balance of the student loan. If you fail to do this, your student loan lender may treat your intended prepayment as early monthly installment(s) instead of the prepayment you desired (thus simply delaying when your next monthly installment is due).