Hi Everyone,
I was wondering if someone could clarify something for me, or point me in the right direction - for information. I couldn't seem to find a direct answer in the forums.
Here's the dilemma: I have six federal student loans (well, five now that I just recently paid off one of the high interest loans) and one student loan through the university I attended. Overall, I'm about $30k in debt in student loans. I graduated last year and I've been throwing nearly all my wages at it to make it disappear as soon as possible; but is that the right thing to do?
I know that may sound like a silly question - OF COURSE I should pay it off! - but how fast should I? If I continue my current payment path, the loans will be gone within a year.
A few, random posts noted that paying off an installment loan too quickly may have a negative effect on FICO scores. Is this true? Should I prolong them a bit? - seems like an illegal trade of interest payments for a higher FICO score, if it is true... But on the other hand, I'll be able to fund my Savings account again and slowly work on that 20% mortgage downpayment 
I currentlly have no auto loan nor a mortgage, but I plan on obtaining both within a few years. Hopefully. My current FICO scores are 750+ across the board, and the federal loan I paid off in haste has not cleared to the CRAs yet - so I'm not sure how that will affect it. Suggestions/tips to help me and others get to 850? Thank you!
@Anonymous wrote:Hi Everyone,
I was wondering if someone could clarify something for me, or point me in the right direction - for information. I couldn't seem to find a direct answer in the forums.
Here's the dilemma: I have six federal student loans (well, five now that I just recently paid off one of the high interest loans) and one student loan through the university I attended. Overall, I'm about $30k in debt in student loans. I graduated last year and I've been throwing nearly all my wages at it to make it disappear as soon as possible; but is that the right thing to do?
I know that may sound like a silly question - OF COURSE I should pay it off! - but how fast should I? If I continue my current payment path, the loans will be gone within a year.
A few, random posts noted that paying off an installment loan too quickly may have a negative effect on FICO scores. Is this true? Should I prolong them a bit? - seems like an illegal trade of interest payments for a higher FICO score, if it is true... But on the other hand, I'll be able to fund my Savings account again and slowly work on that 20% mortgage downpayment
I currentlly have no auto loan nor a mortgage, but I plan on obtaining both within a few years. Hopefully. My current FICO scores are 750+ across the board, and the federal loan I paid off in haste has not cleared to the CRAs yet - so I'm not sure how that will affect it. Suggestions/tips to help me and others get to 850? Thank you!
I don't think there is a right or wrong answer to this. Each person has to decide what works best for them.
As for me I want to pay off every debt as fast as possible. Being debt free is my #1 priority and concerns about my score comes in a very distant second.
@Anonymous wrote:There's a number of things one should consider when trying to decide how fast to pay off a debt. Before I go into them, let me first say: congratulations for engaging in the habit of keeping your spending far less than your income. This is a crucial habit that is going to make all kinds of thing easier for you during the rest of your life, and it is a very rare habit. Wealthy people and poor folks alike have a tendency to spend MORE than they make.
Now for some of the factors that affect the decision of paying off (or paying down) a loan:
(1) What is the interest rate of the loans? Based on your story, I am guessing that these loans were taken out during the last five years, when interest rates have been very low. If so, the amount of interest you are paying is pretty trivial. Note also that, since you have already paid off a big chunk of the principal, the amount of principal generating interest is also much lower. A key reason to pay off a debt is because you are paying huge amounts in interest: it's a prime reason a person should pay off (though not close) credit cards as quickly as possible. That sounds like it is not the case here.
(2) What could you be doing with your money instead of investing so much of it in paying off the loans? You mention that you are throwing every available dollar into this task. If so, that might mean that you are not contributing any money to an employer-funded 401k plan, in which case you might be missing out on matching dollars -- essentially free money. Even if you are investing enough to get matching 401k dollars, it's worth doing the math to see that, since you are young, every dollar you invest today in (say) a Roth IRA will likely be worth many MANY times that (tax free) when you retire.
(3) Have you paid off a big chunk of the principal already? The answer is yes, which means you have open installment loans in which the balance owed is small compared to the original amount borrowed. That's GREAT for your credit. Paying them off altogether, however, is analogous to closing a credit card -- they will cease to be open, they will ultimately fall off your records sooner, etc. By allowing them to stay open, you will continue to build a long(er) history of several loans all managed without a single late payment. Again VERY good for your credit, for your average age of accounts, etc.
Final note: you mention a worry that using a prolonged history of installment loans to build credit would be illegal. (".... seems like an illegal trade of interest payments for a higher FICO score.") It is pefectly legal. Google "Credit builder loans" for example. Those are precisely a person setting up an installment loan, paying interest on it, so that he can improve his credit.
You also mention that you will need a 20% downpayment later on to buy a house. You don't. If you continue to build your credit, 10% or 5% is fine. Of course, there are advantages to paying the full 20%, but there are also huge advantages to a young person investing money in retirement accounts too.
Those are just a few thoughts. Congratulations on starting off your life in such a responsible way. Best of British luck... :-)
Thanks for the detailed response!
1) All but one of the loans are less than 5%; I have one at 6.8% - which I'm focusing down at the moment. And yes, the interest is minute compared to the principal being paid.
2) Already have the 401k and Roth IRA funded and prioritized prior to anything else 
3) I've paid a pretty big chunk - not at the halfway mark yet, though. My FICO took a pretty big hit when all the installment loans "activated" after graduation, but it's almost back to where I started. I assume, then, that I'll be safe by paying the loans off as soon as possible; as long as I apply for the mortgage/auto while my paid off student loans are still being reported by the agencies? To my understanding, my score will be at its highest while I'm still paying the installments; then it'll drop after they are paid off (hopefully not a lot); increase overall by "gardening" other accounts; and take a hit again after they drop from the credit reports?
I never heard of a Credit builder loan until now; interesting. And concerning the 20% downpayment - I'd rather not pay the PMI if possible haha.
Thanks again!
You've had some great responses here.
I had a similar delima a few years ago when I graduated. Ultimately, much of it is not a right a wrong answer, but what is right for you, lets you sleep at night, not stressed about your loans.
For me, I ran the math, then I ran the math again 50 different ways with different payment amounts. For the most part loans with 4 - 8% interest, paying more then 50% extra on top of minimum payment does little to help you pay it off faster or reduce the interest over the life of the loan. For the loans with less than 4% interest (I have 5 that are at 2.33%) paying more than 25% extra over the minimum payment does little to reduce payment time or interest paid. And at 2%, the rate is beating the rate of inflation, so I'm ahead of the game there. So for me, that was my sticking point with how much extra I would put towards my loans - I can live with them for the next 10 years, they'll be paid off in half the time of original terms and I'll still save a ton on the interest. Since paying extra beyond that does little to save on additional interest, I figure I can put my money to better use elsewhere.
Before making the extra payments on the loans, I prioritized getting my company match on both my 401(k) and HSA accounts, I portioned half of my extra money to student loan paydown and building up 6 month emergency fund. I didn't want to lose out entirely on the compunding benefits of paying extra to my loans, since you get the most bang for your buck the earlier you start, but also wasn't comfortable not having a 6 month emergency reserve fund - If you get injured and can't work, saying I was responsible and paid all my extra money to my student loans, won't keep the lights on. Once I reached the 6 months in reserve funds, I put all extra money, up to 50% on top of regular payment towards each loan over 4% - save more on interest that way since they're all relatively close or same in interest rates - with 7% - 9% interest loans, it may make more sense to pay down the high rate ones first.
Any extra money I have left after that goes to fully funding my HSA beyond my employer match, and the little bit let over after that - I upped my 401k contribution by 2% - giving a 0 balance budget. And dropping me to a lower tax bracket.
That's just an example of things to consider and look at - there is no 'right' thing to do, other than what will give you peace of mind and help you sleep better at night - that was just the formula that works for me 
If it were me, which it is not, I'd suck it up and pay it off, but I don't like owing and my cash piles up quckly this way. Good luck whatever you decide.
