How to Repay Student Loans Early

Sometimes it make sense to pay off your student loan right away but that's not always the case.

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Brendan Langen is in an enviable position. Like many recent college graduates, the Indiana University alum has about $20,000 in student loan debt. But unlike former students who repay their loans over 20 years, he will spend the next two to three living rent-free with his parents and directing $12,000 of his annual take-home salary into paying off his debt early.

"I don't want to have to deal with the stress of paying these back (over decades)," he says.

Most coverage of student loans focuses on the nightmares that can occur when a graduate struggles to make his monthly student loan payments. As Langen has learned the hard way, pre-payment comes with its own set of hassles.

The first question is where to begin--if at all. If you're in a position to pay off debts early, it pays to attack your costliest obligations first. With many young graduates, that means reducing credit card debt first.

"Some student loans have low interest rates relative to everything else," says Ron Roge, a wealth manager in Bohemia, N.Y. The average student loan comes with a 10% interest rate, while credit card companies like and often levy 15% or more in interest charges.

Another thing to consider: If you have a 401(k) at work, it likely makes sense to contribute at least up to the maximum level matched by your employer before diverting extra savings into prepaying student debt.

For Langen, neither credit card balances or a 401(k) was an issue--but his five unsubsidized federal Stafford loans were. They carried interest rates ranging from a variable 2.4% to a fixed 6.8%.

If he consolidated these loans, either through his own bank, , or via rivals like or , his new fixed rate would actually rise a bit, according to Mark Kantrowitz, the publisher of FinAid, which tracks the student loan industry.

"The consolidated loan isn't just a weighted average of all the interest rates," says Kantrowitz. "It's actually rounded up to the nearest one-eighth of a percentage point." That penalty would run about $50 per year for someone with Langen's debt.