Before you speed up
Extra payments are the right move for most borrowers, with one large exception. If you work for a government agency or a nonprofit and are counted toward Public Service Loan Forgiveness, which forgives the remaining federal balance after 120 qualifying payments, paying early simply gives away money that would have been forgiven. Confirm your status with the servicer before you accelerate. Moving federal loans to a private lender can lower the rate, but it permanently ends access to income-driven plans, federal deferment and forgiveness programs.
Making extra payments count
A servicer left to its own devices may spread an extra payment across all your loans or push your next due date forward, which is called paid-ahead status, instead of reducing principal. Give a standing instruction, in writing or in the online account, to apply any amount above the minimum to the loan with the highest interest rate and to leave the due date alone. Taking the highest rate first is the cheapest route. Stay on autopay throughout, since federal loans carry a quarter-point rate discount for it.
The final payment
- You request a payoff quote, which states the exact amount due if it is received by a specific date.
- You pay that exact amount before that date.
- You confirm a few days later that every loan shows a zero balance and a paid-in-full status.
- You turn off autopay if it has not ended by itself, and you ask for a refund of any overpayment.
- You download or request the paid-in-full letter and store it with your permanent records.
Afterward
Check your credit reports at annualcreditreport.com a month or two later and confirm that each loan shows as closed with a zero balance. Your score may dip a few points when the accounts close, because your mix of credit has changed. The dip is small and temporary, and it is no reason to keep a loan alive. At tax time, the servicer's Form 1098-E shows the interest you paid in the final year, which may be deductible.
The payment you no longer make
The most valuable move comes the next morning. Set an automatic transfer of the same monthly amount into retirement and savings before your spending expands to absorb it. You have already proved that you can live without that money.
Tip Keep the servicer's letter, a final statement and your payment history together. Errors on paid loans do surface years later, and the borrower with documents wins quickly.
