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Member
Posts: 10
Registered: ‎07-31-2007
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Does it make sense to pay off Student Loan debt sooner rather than later?

I consolidated my Student Loans almost 5 years ago which brought  my monthly payment to a more manageable $141.50. I pay about $200 a month and am thinking of sending $300 a month in order to pay it off sooner.

 

I remember hearing once (I think it was Suze Orman) that you shouldn't worry too much about paying down student loan debt because it is considered good debt and it is good to have an installment loan for a nice mix of credit.

 

My concern is that my Transunion score is always lower than the other two and one of the reasons they list is that my remaining balance on my installment loan is too high.

 

What do you think? Is it better to try to pay down the loan sooner or just pay the minimum amount every month.

 

Thanks in advance

New Contributor
Posts: 51
Registered: ‎01-23-2009
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Re: Does it make sense to pay off Student Loan debt sooner rather than later?

If I were you, and I'm not, I'd pay it off as expeditiously as possible. Unless of course you enjoy paying interest. Get them paid off, continue putting that same amount into CDs or an IRA and put that money to work for you. Student loans are great to get thru school as well as credit cards to get thru emergencies. But to pay some one any additional interest, just to have a installment loan or activity on a credit report is foolish. It sounds like you are young, make cash king!
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Posts: 3,240
Registered: ‎04-03-2008
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Re: Does it make sense to pay off Student Loan debt sooner rather than later?


ceeceeloo wrote:

I consolidated my Student Loans almost 5 years ago which brought  my monthly payment to a more manageable $141.50. I pay about $200 a month and am thinking of sending $300 a month in order to pay it off sooner.

 

I remember hearing once (I think it was Suze Orman) that you shouldn't worry too much about paying down student loan debt because it is considered good debt and it is good to have an installment loan for a nice mix of credit.

 

My concern is that my Transunion score is always lower than the other two and one of the reasons they list is that my remaining balance on my installment loan is too high.

 

What do you think? Is it better to try to pay down the loan sooner or just pay the minimum amount every month.

 

Thanks in advance


 

Do you have any other debts, or do you have any investments?  In general, if you have X dollars per month available for investment and/or debt reduction after paying all living expenses, the optimal use of those dollars will be whatever gets the best AFTER-TAX rate of return, adjusted for risk.  Paying off a debt is in effect an utterly safe investment with a yield equivalent to the interest rate paid on that debt.  Some debts, in some cases, may be tax-deductible, such as mortgages or student loans depending on various details.  Some investments also may get favorable tax treatment, again depending on various details.  Of course if your financial situation is such that you are better off taking the standard deduction than itemizing, in your case the interest on your loans won't get you any tax deduction.  ANYWAY, for each place where you might put those dollars you figure out the effective return for you after taxes, so you are doing an apples-to-apples comparison.

 

The reasons why Suze Orman and most other financial planners consider certain debts, such as student loans and mortgages, to be "good debt" and consider other debts, such as credit cards and car loans, to be "bad debt" is because good debts are for money spent now that will benefit you in the future while bad debts mean paying in the future for spending that has only short-term benefits.  When I was student I borrowed some money to help pay the cost of my education, which I paid off some years ago, and I am still today benefitting from what I learned then.  Had I borrowed an equivalent amount of money to pay for junk like fancy cars, big-screen televisions, luxury vacations, and so forth then I would still have been paying it off for years afterwards, but the benefits would have been long gone.

 

Anyway, the "good debt" versus "bad debt" distinction is about whether it makes sense to borrow the money, once the debt has been incurred the decision of how quickly to pay it down is mostly a matter of rates and dollars.  In theory, an investment might have a higher rate of return than your student loan debts, in which case it could make sense to invest rather than pay more than the minimum on those loans.  In reality, especially right now it's hard to think of an investment with such a high yield that is not also very high risk, so in practice for most people paying down debts will have better returns than any alternative investments.

 

Now, in many cases student loan debt will have a low interest rate and favorable tax treatment, so it will make sense to pay other debts first, not because the other debts are "bad debt" (though they might be), but simply because the other debts have higher rates.

 

There is one important caveat to the rule of paying down the highest-rate debts first: if you don't have at least a few thousand dollars in emergency funds, then I think your first priority after paying current expenses and minimum payments on debts should be accumulating at least a modest emergency fund.  The financial flexibility of being able to handle an occasional surprise without incurring debt is always important, but having some cash is particularly important in today's uncertain economy.  But once you have a modest emergency fund then in most cases I think paying down debts is usually the best use to make of your extra dollars.

 

Here is an interesting discussion of such issues in a different context, mortgages.  I realize student loans and mortgages are not the same thing, but they are somewhat similar in that both are long-term debts with relatively low interest rates that often get favorable tax treatment:

 

Article

 

 

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Member
Posts: 10
Registered: ‎07-31-2007
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Re: Does it make sense to pay off Student Loan debt sooner rather than later?

I dont have any other debts. I paid off credit cards and car loan. My student loan is all I have left. I also have my emergency fund. I think I will increase the amount I pay towards my Student loan in order to get rid of it sooner.

 

 

Thanks for all the advice.

 

 

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