Prepaying Your Loans

There are no prepayment penalties on any of the student loans you have borrowed while in law school. You can prepay a loan at any point in time and must repay only the principal and interest that has already accrued on the loan. It is always advantageous to make any prepayments on your highest interest-rate loan first, to the extent of fully repaying a higher interest-rate loan, before making a prepayment on any lower interest rate loan.

If you want to make a prepayment on a loan, you should first contact your lender to get specific instructions. When you call, ask about the best way to make a prepayment, and find out the correct address or web site to which you should send the payment. Keep in mind that you first have to pay the interest that has accrued to date; any remaining amount of your payment will then be applied to your principal balance due. For example, if 15 days of interest has accrued on the loan for a total amount of $100, your prepayment will first go to pay off the accrued interest of $100, and the remaining amount of your prepayment will reduce your principal balance. After making a prepayment, you should always confirm that your prepayment has been applied to your account appropriately as a lump sum to reduce the outstanding interest and principal, rather than being applied to your loan account as a series of future monthly payments.

A loan is capitalized when all interest that has accrued to date is added to the principal loan amount. Capitalization rules can vary by loan program, but generally student loan interest is uncapitalized until just before repayment begins. Before capitalization, interest accrues on the original principal loan amount. After capitalization, future interest will accrue on the new loan amount (the original principal amount plus capitalized interest). If you pay the uncapitalized interest just before the date capitalization occurs, your principal amount will not have the uncapitalized interest added to it, and you will thereby avoid paying additional interest on the accrued interest. Note that if you make a prepayment on a loan with uncapitalized interest, the uncapitalized interest must be fully paid before your prepayment will reduce the principal balance. If you wish to prepay uncapitalized interest before it capitalizes, be certain to check with your lender to find out when your interest will capitalize, and remember that it is always advantageous to prepay the loan with the highest interest rate first.

It is important to know that if your prepayment does not pay the loan off in full, your next regularly scheduled monthly payment will still be due. In other words, while the prepayment does not reduce your monthly payment amount, it will reduce the number of times will be required to make that monthly payment, and thereby reduces the amount of interest you will pay over the life of the loan.

Last modified: February 12, 2014