Get new SL to pay off old SL?

[newmomnewme]

Is this a good or bad idea? I am in graduate school and my employer offers a tuition program (it is reimbursed AFTER I pay for it).....so I was going to take out a loan and then pay it back when I am reimbursed from my job. But, wouldn't it make more sense for me to pay off one of my older loans (oldest is 1999)? If I have the option.....

[Rikku]

Unless things have changed, federal student loans can only be used for qualifying education expenses, such as tuition, fees, books, and room and board. The funds for my federal loans always went directly to the school - never to me. If the funds go to you rather than to the school, make sure you understand what you can legally use student loan funds for. I would not consider taking out a private loan to pay off previous student loan debt - the interest rates are way too high now.

If it is legal for you to use a new student loan to pay off an old one, you'd have to look at the interest rates to decide whether or not it would be beneficial to you financially. Student loan interest rates were much lower when I was in school than they are now, and I expect you'll find the same if you look into it further. Unless the interest rate on the new loan is signficantly lower than the older one, however, I don't see how it matters - if you have the same amount of debt at the same interest rate, who cares whether it's an old loan or a new one? Unless you want to use the new one as a way to consolidate your previous student loans - in which case just apply to consolidate them. But to me, taking out another loan to pay previous loans is just punting the debt problem and doesn't make sense unless there is significant interest savings.

[newmomnewme]

I was thinking if I paid one of the older ones....at least the interest, my SL wouldn't be reporting as maxed out....but I am not so sure. 87k plus new loan would be 97k, then pay 10k takes me to 87k balance on 97k borrowed. Instead of owing 87k of 87k. 

[Rikku]

I see your logic, but I wouldn't worry about it. Utilization on installment loans doesn't contribute to your score the same way that utilization on credit cards does. It does play into your credit score, but it's a VERY small part.

Your CR may have 'high balances on installment loans' listed under 'things that are negatively affecting your credit', but this is VERY common for people with SLs and it doesn't play a big role in your CS. Actually, if that appears there, it means that the credit bureau or lender is REALLY grasping at straws to tell you what you can improve. The cleaner your CR, the crazier the comments in that section will be. One of mine says that my current number of inquiries is negatively affecting my score - I have ONE! One inquiry is nothing, yet it's the worst thing on my CR so it ended up there.

I would use the tuition reimbursement from your employer to pay off the new SL. Firstly, the money from your employer is for THIS round of school, not for paying off whatever debt you see fit - so make sure there is a clear paper trail, just to make sure that you're following your employer's rules. Secondly, as I mentioned above, the balance to original amount ratio on installment loans is not very important to your credit score. Thirdly, with lots of SLs, it's easy to get mixed up or confused, so I would keep your situation as simple as possible. Use the reimbursement money to pay off the new SL and consider consolidating the rest.

You didn't mention whether you're in grad school full time, but if your older SLs are deferred because you're back in school, you should pay the interest on any unsubsidized student loans while they're deferred. I wish I had done that on my undergrad loans while I was in grad school.

[newmomnewme]

Thank you so much. Yes, I am in school full time...my loans are deferred and I am so embarassed....I have loans from 1999 for my first masters and there is about $6k in interest for the unsub loans. I am a few classes away from finishing a 2nd masters, so I think I am going to use the reimbursement to pay back the new loan and pay the interest as I go. I am at the tail end of rebuilding my credit after a few tough years 2008-2010. 

I will have some extra $$ to throw at some bills, it would be awesome to get the SL under 75k. Thanks again for your help. 

[Rikku]

You're welcome, and you have nothing to be embarrassed about! A lot of people have student loans, and hopefully your new degree will open the road to career progress, making it easier to pay them off. Congrats on being almost done and on rebuilding your credit! On the plus side, paying your loans every month will be great for your credit, so as long as you keep on the right path with everything else, the loans will help your scores. My CS is close to 800 - and that's mostly due to SLs, as I only have two CCs and a car loan outside of my SL TLs. Keep a perfect payment history on your SLs and good CC utilization and you'll be golden!