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Student Borrower Q&A: Can I Prepay My Loan?

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I recently received an email from a student who had some questions concerning whether she could begin paying off her student loans while in school, and if so, are there any limitations?Here is her question:

I am in college and graduate next year in 2012. I have student loans and will take out a little more student loans before next year. I want to pay off part of my student loans before I graduate. I heard a student can only pay $600 maximum a year on student loans while in school, otherwise they will have to file taxes or something.

Can I pay off student loans while in school? If so, is there a maximum I can only pay a year while in school? Do students have to file taxes if they pay back a little bit of their student loans in a year while in a school?

My response:

You can make payments towards all federal student loans while in school. Many private lenders offer this option, as well, and let you make payments towards students loans accruing interest. Just verify with your lender to make sure there are no prepayment penalties. I highly recommend doing this if possible, especially if you have any unsubsidized loans where the interest accrues while you are in college. Making advance payments not only reduces the amount you will owe upon graduation, you will be debt-free faster and pay less interest along the way. Additionally, if you have income, your interest payments may be deducted from your taxable income—up to $2,500 a year.

There is no limit as to how much you can pre-pay, either, but if your interest payments exceed $600 in one calendar year, you will need to receive and submit the IRS Form 1098-E (sent to you by your loan servicer) in order to claim your interest deduction. If you paid less than $600 towards interest, you won’t necessarily receive this form in the mail, but you can still claim the deduction. Just keep a record of all your payments, in case the IRS chooses to follow up with you.

In summary, if you can pay down your student loans while in college, it’s a smart way to get ahead of your finances before embarking on the real world. There’s also the advantage of earning the student loan interest tax deduction—which is money back in your pocket!

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