Which loan amount do they use? And what should I do?

[Anonymous]

Not sure if this is best put here or in the Student Loan section.

This past summer I completed the student loan rehab process to get my loans out of default and the interest that had accrued was rolled into the principal.  I am now on an IBR payment plan, but pay about $100 extra per month.  I started using the snowball method by paying down my smallest loan (also is tied for the highest interest rate) to below the original amount, so that I am under 100% utilization on that loan (very, very small victory on my part), which was my initial goal.  However, due to me being on the IBR plan, my loans will never be paid off and if I only make the minimum payment each month I am basically paying the interest + $5 or $6 between my 11 loans.  On one hand, I don't see much point in making additional payments if the loans aren't being paid down, the only benefit being a smaller tax liability when I make my last payment.  I am currently looking for a house and when I find one, would much rather put the extra $100 towards the mortgage each month and build some equity there.  If I continue making the additional payments, do I need to get them below the new prinicipal balance with the formerly charged interest, or do I need to get them below the inital loan amount to make a dent in my utilization?  Example:  

Original Principal:  $7,312

Unpaid Prinicipal:  $9831.18

Current Balance:  $10,511.38

This is my largest loan and also tied for the highest interest rate (6.8%).  I would like to tackle this one next if the unpaid principal is the number they will go off of, otherwise I think I am just going to stick with the minimum payments.  Or would it just make sense to keep paying on the smallest one (would be paid off in about six months) and have a completely paid off loan?  I am also expecting my IBR to drop when I refile next year as I do not have a second job anymore.  If my income is close to what i predicted, it would be about $100 less.  Any suggestions or best practices would be much appreciated.  

[JakeRogue]

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@Anonymous wrote:

However, due to me being on the IBR plan, my loans will never be paid off and if I only make the minimum payment each month I am basically paying the interest + $5 or $6 between my 11 loans.

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I don't understand this part...

[Anonymous]

The income based repayment plans do not fully ammoritize the loan amount.  I believe I will be making payments for 20-25 years and whatever the balance is at the end it is essentially forgiven, but I may have a tax penalty for it.  This is of course assuming no major changes in income.  Currently, my required payment is roughly $210 monthly on a $46,000 balance.  This payment essentially covers the interest each month and then a VERY small amount (roughly $5) goes towards the principal.  I have 11 loans total to spread that $5 between.  So payment = $210, interest =$205, balance reduction =$5 each month.  I hope that helps!

[Anonymous]

You use the word "they" in the subject line...

"Which loan amount do they use?"

and also toward the end of the post....

"I would like to tackle this one next if the unpaid principal is the number they will go off of, otherwise I think I am just going to stick with the minimum payments."

I am guessing that by "they" you mean a potential mortgage lender when you get around to buying a house.  Can you clarify?

If so, are you asking whether your chances of approval or securing a good interest rate will be helped by paying your student loans down to less than the original amount of the loan?

[Anonymous]

"They" is referring to the FICO gods, those who determine my score.  I'm not concerned about my scores at this point for the mortgage, I already have the pre-approval, I'm just looking to the distant future.  What I am asking is for utilization purposes, do they use the orginal loan amount or the current unpaid principal?  If I am looking to calculate the utilization on these loans, which number do I use?

[Anonymous]

We have very little reliable test data here.  What we'd need is a person with loans well over 102% of the original amount, who then pays them down to < 98% in one payment, with careful attention to making sure that every other part of his profile stays exactly the same.  Then see what happens to their scores.  And to do that with at least 3-4 different people.  So far that's not been done.

If I were you, I'd assume for the moment that there is no such benefit.  Instead start working with the folks here on your FICO 8 scores now.  Tell us what they are, what your CC utilization is, how many cards you have, etc.  If you can get your scores to over 780, then you can forget about the loans, since pursuing the paydown will be costly.

Bear in mind too that you are wondering what your scores will be like several years from now, possibly even decades.  All the folks here can meaningfully tell you is how the FICO 8 models work, and to a lesser degree how FICO 9 and the old mortgage models work.  We have no idea what models will be used in the distant future.   If FICO 8 gives you a bonus for paying a student loan to under the original loan amount, that doesn't mean FICO 9 does or FICO 10 will.

And as I say, even for FICO 8 we don't have reliable data to answer your question.

[Anonymous]

My scores will not get to 780 any time soon.  I have quite a few late marks that will come off in 2019 (2012 was my rock bottom) and the last ones in 2022.  I have done a few goodwill letters/email/phone calls with no luck.  My most recent will be two years old in January and I am hoping that once I have two years of good payments they will reconsider (CapOne and Comenity if it makes a difference).  I have 6 credit cards with a total utilization of 1%, oldest is three years old .  There really isn't anything to do to improve my profile at this time other than age it, get rid of the lates, and lower my installment utilization.  I am hoping for a slight bump after my newest cards turn six months old on December 1st.  With just three more points on my mid-mortgage score I go up a tier and get a better interest rate.  I do have the ability to drastically pay down my student loans, but at this point would prefer to put it towards the house and get a conventional loan vs FHA with a smaller down payment.  The money is invested and with my student loan interest rates, it was recommended that I keep it invested as I am making more in investments than I am paying in student loan interest.  I really think that my scores have plateaued for now.