Paying Off Student Loans With Lump Sum

Making lump sum payments towards your student loans can be very beneficial and also appealing. But is this an easy approach and is it a good idea? Learn about how lenders deal with lump sum payments, settlements and how this can impact your student loans and credit status.

Updated by B Harshitha on 28th February 2020

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Millions of students are plagued by student loans every year. Making repayments on their student loans is a huge responsibility that people all across America shoulder. While student loans make education a possibility for kids aspiring to go to college, paying them off is no joke. It can be a tiresome and strenuous affair depending on the terms and conditions that you agree to. Also the money that is shelled out in the process of repayment is no small number. 

Student loan repayments can go on for years over the course of which you will pay a considerable amount of money towards your loan’s interest alone. So it is easy to see why the prospect of making a lump sum payment towards your loan in an effort to bring down the debt balance by a big number can be tempting. Borrowers do run into situations where their bank account looks a little healthy or they receive bonuses from work. During such circumstances, it is only understandable that a borrower would want to make a large payment towards their student loans.

Can you repay your student loans in one lump sum payment or any number of lump sum payments at all? The short answer to this question is yes.

But is making a lump sum payment towards your student loan a good idea? Some circumstances allow this to be an appealing option while others do not. Let us learn more in detail to see if a lump sum payment is a good fit for you and your big picture.

TABLE OF CONTENTS:

Lump sum payments reduce interest paid towards student loans

If you have $40,000 in student loan debt and you run into a certain amount of money that is large, say $20,000, it is only natural for you to wonder if your lender would accept this as lump sum payment towards your student loans. This sounds sensible on both ends. As a borrower it is beneficial for you since you will save a ton of money over the loan’s life. As a lender, from a borrower’s perspective, it looks to be beneficial for them too in a way since if you make a lump sum payment, they get a lot of cash earlier than stipulated. 

Interest rates vary between 4.29 and 6.84% for federal student loans. Rates vary depending on whether you opted for a fixed or variable payment plan with private student loans. Making a lump sum payment, as already mentioned could help you save interest money. If you borrowed $30,000 at a 5% interest rate, for 10 years you would have to make a monthly payment of $320. This sums up to $8,000 in interest over the loan’s lifetime. But even with a lump sum payment of as little as $5,000, you could end up saving $2,500 from your interest money. 


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Lump sum payments can reduce time required to pay off student loans

If you agree to make the same payments every month, making a lump sum payment towards your student loan could reduce your repayment term. Going by the example explained in the previous section, if you make a $5,000 lump sum payment towards a loan of $30,000 and continue to make monthly payments of $320, you could reduce the lifetime of your loan by two years. If you can afford to increase your monthly payments a little more, this duration can be reduced by more.  

We all have different goals we wish to save up for and pursue. So student loan repayment is not the only expense that borrowers have. Paying off your student loans in a smaller period of time can ensure that you have more time to work on your other goals and devote money and time towards them. 


Why do lump sum deals not work with lenders?

Lenders are often not concerned about how much money you can give them in the present. They would rather benefit in the long run. They would much prefer it if you would pay the minimum towards the student loan over its lifetime. This is because any extra money, including any lump sum amount that you pay towards the loan, would trickle down to reduce the principal amount. The principal amount happens to be the amount that was lent to you by the lender. By you, the borrower, repaying it off, the lender avails very little to no benefit. Interest money is an important source of income for student loan lenders. This is why most borrowers do not agree for lump sum payments if there are alternatives that could help them benefit. So on a borrower’s part, it would be a smarter move to reduce interest rate than to arrange for a lump sum payment.

Any large partial payment that you could make will reduce interest and fees that they can charge on your loan. This is why it is very difficult to get a lender to agree for a settlement or a lump sum payment. The best case scenario is one in which you make a full repayment, if your lender agrees to it. 

Nonetheless, try talking to your lender and negotiate your student loan payoff plan.


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When do lump sum payments and settlements work?

Can you settle student loans? Yes. Lenders agree to accept student loan settlements and lump sum payments on student loans if the borrowers are way behind on their repayments and their loans are in default.

This is because lenders realize that this is quite a threatening situation for the lender to be in since the borrower may never repay the loan. So instead of gambling over the future they choose to settle for whatever they may get.

If you are on time with your payments and reveal to them that you would like to make a lump sum payment or settle the debt, the lender is aware of your potential to repay your loan. So there is a good chance they will not agree to your suggestions. In scenarios like these, student loan debt negotiations fail to be of much help.


Is defaulting on your loans to get a settlement a good idea?

Can you settle your student loans for less than what you owe? Sometimes, yes. You may be tempted to avoid making payments towards your student loans in an effort to avail a settlement. You may want to push it till your loan is heavily in default and then bring up a settlement to your lender at which point they will have no choice but to agree.

While it sounds smart, this is an incredibly dangerous route to take. This can even cost you a lot of money in the long run. 

To begin with, this can be extremely perilous for your credit score. Bad credit scores can make it very difficult to secure mortgages in the future or get loans with good interest rates. 

Another thing that you may forget even as you avoid repayments in an effort to force your lender to agree for a settlement is that your balance continues to grow. Your interest will not cease to accumulate. Your late fees also add on to this growing pile of money. You may end up with a debt that is much larger than what you began which renders the settlement you so desired pointless in the face of your large balance.


Some things to remember about lump sum payments

The following are some key points you must remember about lump sum payments:

Lump sum payments qualify for a tax deduction

You may write off some interest that you paid towards your student loans if you have been making timely payments during tax time.You may still claim it if you pay off your interest using a lump sum payment. 

The only downside, which happens to be very minor is that paying off your student loan at one shot makes you eligible for the entailing tax deduction that it brings. This also affects the amount of refund that you get.

Have a safety net

It is not a good idea to drain your savings all to pay for your student loans, especially if there is no immediate need to repay them in excess. It is important to have some money set aside as a safety net for emergencies. 

Keep an emergency fund in place before making lump sum payments towards your student loans. 


In conclusion..

It certainly looks tempting to make a dent in your student loan debt by making a huge lump sum repayment. Whether this is permitted or not depends on the lender but the borrower is likely to benefit if the lender agrees to it. But it is advisable not to resort to dangerous methods to try and make the leder agree to a settlement.  

Ensure that you have a safety net such as an emergency fund to fall back on before shelling out all your money on repaying student loans. Also remember the other goals you have been or need to be saving up for.

Even partial payments can make a big difference in the student loan debt amount that needs to be repaid. This can be a major step and its repercussions need to be thoroughly understood before going forward with it.