Review recent reporting on student loans, and chances are that stories of eight million people in default and retirees paying off loans with Social Security will come up. Indeed, that many borrowers are failing to make their loan payments or keeping their obligations for decades is cause for concern. But such stories should not distract from a reality illustrated by a recent Consumer Financial Protection Bureau (CFPB) report: Many student borrowers are doing better than fine. In fact, some are paying off their loans early.
The below chart from the CFPB report depicts the share of borrowers who have repaid their loans in full at various points in the repayment process. Just one year after entering repayment, around a quarter of borrowers have already fully repaid their loans. This figure steadily rises as time goes on. By the tenth year of repayment, roughly 70% of borrowers have fully repaid.
The ten-year mark is significant because ten years is the length of the standard federal student loan repayment plan. The standard ten-year plan is also the shortest repayment plan available to federal borrowers (excepting some with very small balances, and those with private loans). Therefore, most borrowers who fully repay their loans before the ten-year mark are likely prepaying, or paying their loans off earlier than they need to.
Naturally, borrowers with small balances are more likely to prepay. Among borrowers with balances between $5,000 and $10,000, 80% fully repay their loans within ten years. This statistic is all the more interesting considering these small-balance borrowers are also the most likely to default on their loans. The chart below hints at this phenomenon: while the share of borrowers who have fully repaid their loans climbs sharply early in the repayment cycle, it flattens out after the ten-year mark.
Because they have more debt to pay down, borrowers with balances above $50,000 naturally make slower repayment progress. But even among these borrowers, roughly 40% repay in full within ten years. Despite the introduction of more generous, longer-term repayment plans in recent years which should stretch out repayment periods, high-balance borrowers entering repayment in 2011 or 2014 still track their peers in earlier years fairly closely.
It’s understandable that many student borrowers want to pay off their loans as quickly as possible, since it’s easy feel weighed down by debt obligations even if monthly payments are a manageable financial burden. But is prepaying your student loans rational?