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difehipi
Posts: 3
Registered: ‎01-06-2014
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Pay off student loan?

Is it okay to pay off student loan early instead of waiting for 25 year to pay it off? I want to focus on my student loan because I want to get a place someday in next 3 or 4 years later.

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SCF
Posts: 1,104
Registered: ‎06-09-2008
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Re: Pay off student loan?

Yes, absolutely.  Federal loans, and I believe most private loans (maybe all of them) don't have any sort of pre-payment penalty, and paying that quickly will save you a lot in interest.  Once the loan is paid it will stay on your credit report for 10 years if it is a positive account, so you don't have to worry about losing its history anytime soon.

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NachoHunter
Posts: 11
Registered: ‎02-05-2014
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Re: Pay off student loan?

I spoke to a financial advisor and they suggested I look at the interest rate on each individual loan before I paid any off.  Not all student loans are equal.

 

Come to find out I had a mix of loans with either 6.8% interest or 2.3% interest rates (I have about 9 different loans and it was about a 5-4 split).  I was told that my best course of action would be to pay off the student loans with the 6.8 one by one and in full and to leave the 2.3% interest loans sitting and pay them forever.

 

Why?  Because if I want to buy a house and will need to borrow money, my rate will likely be lower than 6.8, but higher than 2.3.  So why would I use money I already have to pay off something with 2.3% interest, only to go borrow more on the mortgage and pay 5% on it?  Also, 2.3% is pretty close to the rate of inflation, so your loss on paying off that loan in terms of real dollars is pretty negligible.  Likewise, if I were to take the cash on hand and invest it, I would have a very hard time producing a steady 6.8% return on investment, so therefore I am "making money" by using the disposable cash to pay off loans instead.

 

Also, he said to pay each off in full because if you do not pay one single loan off in full, they will still request the full payment amount monthly.  Paying early without paying it off 100% will not lower your payment, it will instead lower the length of your repayment.  

 

As far as credit goes, any time you pay down your total debt, it helps your score.  So if you won't already qualify for one of those low interest mortgages (having a 20% down payment will help a LOT) then you need to figure out if paying off low interest student loans will give you enough benefit on your mortgage interest rate.  To explain, if you have $10k in 2.3% loans and currently qualify for an 8% mortgage, you'd need to have good reason to believe paying those off will result in at least a 5.7% mortgage to break even.  Which feels unlikely.

 

If your student debt is the difference between a 10% mortgage and not getting approved at all, then that's a different calculation you'd have to make. 


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