Can You Get a Discount for Paying Student Loans In Full?

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Stanley Tate

#1 Student Loan Lawyer

Updated on October 6, 2022

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.

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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.

The only time you can save money by paying federal or private student loan debt in full is if you miss enough monthly payments and your loans default. Here’s what happens when you default on a student loan.

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.

Learn More: Tax Implications of Settling Student Loan Debt

The drawback to an early payoff

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 Nowadays, those perks have faded and been replaced by interest rate reductions, usually .25%, for borrowers who enroll in automatic payments.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.

Learn More: Student Loan Servicing Companies

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.

Teachers, nurses, government workers, and employees of nonprofits qualify for the PSLF Program, which wipes away their debt after 10 years of work. Read more about how to qualify for Public Service Loan Forgiveness.

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.

Learn More: How to Refinance Student Loans

Bottom Line

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.

UP NEXT: Settle Student Loans for Pennies on the Dollar

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