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My wife & I have run into a large sum of cash recently and are interested in paying off/paying down our student loans -- about $30k between us, at about 6.5% avg interest.

We're both earning enough that we can no longer claim student loan interest on our taxes, and are hoping to buy a home etc and would like to bring down our Debt-To-Income ratio.

From what I understand there are typically early-termination fees to consider. Are there also any tax implications for paying off debt in a lump sum like this?

Does staggering large payments over the course of several months have any advantage? (mentally it'd be nice to get them out of the way now!)

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  • It would be helpful to know if you are taking advantage of any retirement matching from your employers and whether you have enough savings to cover a few months' expenses.
    – Ellen Spertus
    Commented Feb 16, 2019 at 21:54

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Federal student loans (US Dept of Education) do not have prepayment penalties. In addition most private or alternative student loans in this country do not have a early termination penalty, so you should check the terms of your loan agreement to make sure there are no penalties before final payoff. It is also wise to contact the lender/servicer of any of your loans to determine the final payoff amount.

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Take a look at your contract, or discuss with whoever is holding the loan. If there are no prepayment penalties, then feel free to pay the whole lump.

If there are penalties, what is the maximum you can prepay without being penalized? It might be a double payment or some such.

Unless you have some foolproof way to earn a high rate of return (joke), then there is no advantage to staggering the payments as you mention; unless of course that helps you avoid prepayment penalties.

This of course presumes that this is the highest interest rate loan that you owe. If you hold any credit-card balance or other debt at a rate more than 6.5%, of course pay that off first.

Good Luck

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Whether you should pay down a student loan debt with cash comes down to the simple question: if I invested this cash, would I see a greater return than the interest on the debt? Other options for avoiding significant debt (such as bankruptcy) are off the table so it is actually pretty simple to determine the course of action for student loans.

If you have a student loan with a 6-7 percent interest rate, you should pay off the loan before engaging in any investment activity with that cash. The loan will grow faster from capitalized interest than any investment you can likely make.

On the other hand, if you have a loan with a zero percent interest rate and no payments due, you would be foolish to pay that debt off until required to do so (to avoid penalties for non-payment) because any cash you put towards that loan would be better off invested so it can grow- you'll end up better off at the end of the transaction.

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    While your answer is not wrong mathematically, You have to take risk into this type of comparison. You have to make sure that you can afford periodic losses in addition to the minimum loan payments in any risky investment before doing a comparison with a riskless investment. Would you borrow 1 Trillion dollars at 0% and invest it if there were a reasonable chance that you could lose $1 Billion (0.1%) on the risky investment?
    – D Stanley
    Commented Mar 1, 2017 at 17:55
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    That's a good point, and it indicates even more strongly that paying off the 7 percent interest student loan is preferable to investing that money.
    – Jim W
    Commented Mar 1, 2017 at 18:09

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