You can get a discount for paying student loans in full if you negotiate a settlement, but you have to default first.
There’s no simple way to get a discount for paying off your student loans with a lump sum payment. But if you default on private or federal student loans, you may be able to negotiate a settlement that shaves off some of the outstanding interest and principal balance.
Is there a discount for paying off a student loan early?
Your loan servicer won’t offer you a discount if you offer to pay your student loans in a lump sum — no matter how old your loans are, how much you owe, or what your original loan balance was.
When your loan is in good standing, the lender has no incentive to accept less than the full amount owed. The longer you take to pay back the loan, the more interest accrues, and the greater the return on the investment.
After you default, you can approach the collection agency and offer a settlement for anywhere from 10 to 70% of the current loan amount. Read more about how to settle student loan debt.
If you’re successful in negotiating a payoff, keep in mind that you’ll have to pay taxes on the canceled amount. You may end up with a large bill owed to the IRS, depending on your student loan balance.
While it’s good to get rid of debts, paying off an installment account like student debt or a personal loan may result in an initial dip in your credit score because it can lower your average credit age, which accounts for 15% of your overall score.
The good news is that the decline is usually temporary. Your score should bounce back within a month or two.
On-time payment discounts
In the past, many lenders offered lower interest rates to borrowers who made on-time payments for several months. Nowadays, those perks have faded and been replaced by interest rate reductions, usually .25%, for borrowers who enroll in automatic payments.
Autopay doesn’t reward you for making student loan payments. Instead, it ensures you’ll never miss one — as long as you have enough money in your bank account.
Contact your servicer to set up autopay and explore your repayment options.
Alternatives to paying student loans ahead of schedule
Before you pay off your student loans early, look into different options that may save you more money in the long run. For example, the U.S. Department of Education offers different federal student loan forgiveness programs, some of which wipe out the remaining balances tax-free.
All other federal student loan borrowers can get rid of their loans after making payments under one of the department’s income-driven repayment plans for at least 20 years. Read more about student loan forgiveness after 20 years.
Private lenders don’t offer the same type of student loan relief options. Refinancing for a lower interest rate and better repayment terms, like deferments, is usually the only way you can save money on private loans.
There’s no discount for paying off student loans in full unless your loans default. While there are perks to being free from student debt and not worrying about whether you chose the best payment plan, it’s not always the right move for you financially. Weigh your options and consider what will save you the most money before deciding.