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Pay-off one at a time or pay monthly on all?

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Anonymous
Not applicable

Pay-off one at a time or pay monthly on all?

Hi everyone!

 

I'm currently in school for my BA until next year (graduating spring 2019) and I plan on going straight into a Masters program in the fall so I will have my loans on deferment until somtime in 2021-2022 (6 months after I graduate from my Masters program). My question is I have around 13k in federal loans right now (Nelnet), zero lates, but they are accruing interest. At the end of school I will have around 45k-50k in loans total. I have the ability to pay off these loans while I'm in school, and plan on doing that.

 

I would just like your advice on what you suggest is the best way of going about it. Every month I have a surplus of 1.5-2k in extra cash after I pay all my other bills and fund my 401k. I can dedicate all of that to my loans if I want to. My loans are also my oldest accounts (almost 5 years old) and all my credit cards have been opened this year. Would it be in my best interest to pay off each loan at a time starting with the highest interest ones or just make a payment to each loan and pay them off over time? I want to improve my scores as they're low 600's right now and I'm worried that paying off the loans will hurt my credit age. I plan on buying a new car in the next two years (car is over 15 years old) and possibly applying for a mortgage as well as my parent's BK falls off next year and I know they want to buy a house again (long recession story, we lost our house). I'm not worried about being late or defaulting since I am in deferment for so long and these will be paid off by the time I'm out of school no matter what. 

 

I appreciate your advice on this! Smiley Happy

Message 1 of 4
3 REPLIES 3
thornback
Senior Contributor

Re: Pay-off one at a time or pay monthly on all?

*Definitely pay the accrued interest on each loan every month.*

Whether or not you pay down the principal balances while in deferment is entirely up to you (I think it's a great financial move if you have the funds). You won't see a score improvement until you pay them down considerably - enough to pass the utilization thresholds of 88.9%, 68.9%, 48.9%, 28.9%, and 8.9% of the total, individual loan amounts. As you pass each threshold, you should see a bit of a score boost.

If you decide to start paying the principal, pay down those with the highest interest rates first. Though I had a couple of small loans ($800 - 1000) with low rates and paid them in one lump sum first just to get rid of them, then began working on paying down the larger loans with higher rates.

Be sure to leave at least one with around an 8% balance so it will still have some life when it enters repayment - you don't want to pay them all off too quickly as the loans fulfill the credit mix portion of your FICO score - once you pay them all off, you'll need a new installment loan to replace them so not to lose points so make sure another (your auto) loan is reporting before you pay them all off.

Paying them off won't hurt your credit age - closed accounts in good standing will remain on your reports and continue to count towards age for 10 years after the account closing date.

With Nelnet- when you make a payment, there's an option to check to move up the payment due date, essentially taking it out of deferrment - make sure you leave that UNchecked so your current due date after deferrment remains in place and you won't be penalized in the event you cannot pay one month.

Also - consider funding a savings account (if you have not already), in addition to your 401K with some of those surplus monthly funds. Just so you have a backup to pull from without penalty, just in case.
Personal Aphorism:"Forget What You Feel, Remember What You Deserve"
Starting FICO 8s | 09/2017: EX 641 ✦ EQ 634 ✦ TU 647
Current FICO 8s | 04/2022: EX 796 ✦ EQ 793 ✦ TU 790
Current FICO 9s | 04/2022: EX 790 ✦ EQ 788 ✦ TU 782
2022 Goal Score | 800s

My AAoA:
4.6 years not incl. AU / 4.9 years incl. AU
My AoOA: 9.2 years not incl. AU / 11.2 years incl. AU
Inquiries: EX 0/12 ✦ EQ 0/12 ✦ TU 0/12
Report Status: Clean
Garden Status:  


Without patience, we will learn less in life. We will see less. We will feel less. We will hear less. Ironically, rush and more usually mean less.
Message 2 of 4
Anonymous
Not applicable

Re: Pay-off one at a time or pay monthly on all?

Thank you so much for your advice! I appreciate the thorough response. I plan on starting to tackle everything starting in May. I paid off all my other debts and have been working on improving my credit for the last six months. Sometimes it feels like I'm on the never ending hamster wheel of paying off debt lol. I can't wait to get everything paid off and actually be able to help my family and take some stress of them. 

Message 3 of 4
thornback
Senior Contributor

Re: Pay-off one at a time or pay monthly on all?

You're welcome!  Good luck, hang in there, and stay the course -- You have much to look foward to because when you finally get through this -- it will be GLORIOUS!  And the ability to help your fam will be the cherry on top...   

Personal Aphorism:"Forget What You Feel, Remember What You Deserve"
Starting FICO 8s | 09/2017: EX 641 ✦ EQ 634 ✦ TU 647
Current FICO 8s | 04/2022: EX 796 ✦ EQ 793 ✦ TU 790
Current FICO 9s | 04/2022: EX 790 ✦ EQ 788 ✦ TU 782
2022 Goal Score | 800s

My AAoA:
4.6 years not incl. AU / 4.9 years incl. AU
My AoOA: 9.2 years not incl. AU / 11.2 years incl. AU
Inquiries: EX 0/12 ✦ EQ 0/12 ✦ TU 0/12
Report Status: Clean
Garden Status:  


Without patience, we will learn less in life. We will see less. We will feel less. We will hear less. Ironically, rush and more usually mean less.
Message 4 of 4
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