Repaying Student Loans Early - Good or Bad for Fico?
My wife and I are debating whether we should repay her (and my) student loans early or keep them on the record to show an installment debt payment history. We hope to buy a house in the next 12-18 months, and want to ensure we maximize both of our scores. My concern, and the reason for my post, is if we pay them off they'll somehow "fall off" the report and we won't have the strong repayment history, and consequently a weaker FICO.
First her loan situation. Since she was the first graduating class from her pharmacy school the loans were not federally guaranteed, and were instead private loans. The current rate is Libor + , with the effective rate presently at 8.375%. She originally started with two loans totaling approx. $120,000 in mid 2004. We've since whittled the debt down aggressively to approx. $30,000, and are now paying roughly $2,500/mo toward it (approx. $2,000 principal, remaining interest). At this rate they should be paid off in a bit over a year. Since the rate is 8.375%, and given we're keeping our cash in accounts yielding closer to 5%, we're considering paying it off early to avoid the interest hit. As long as we don't buy a house in the next year we won't miss the cash we prepay, and we'll save on interest expense to boot. However, if paying it off early is somehow negative it might be worth the expense of sitting on the term debt...considering an eventual mortgage would likely be a relative whopper (at least to me).
My situation is that I've had an undergrad loan in repayment since 1999. I only owe about $6,000 on it, but on the MyFico score report it shows that as being too much non-mortgage installment debt. I'm not terribly worried about improving my score right now (779 - good enough for me), but since the rate on mine is 7.375% I can save on interest expense by prepaying it as well. As above, I'm afraid that paying it off will make my 8 years of perfect payment history somehow fall away.
In a nutshell, if paying these off early won't negatively impact our scores I'm pretty certain we'll want to do it. That said, if there is a reason we shouldn't pay them off early (besides preserving cash) I'm all ears.