Is paying off student loans a bad idea?

[Tallysmom]

Originally Posted by nep321

I am debating whether it is a smart move to payoff one of my student loans right now and would appreciate some input from others. I am 26 years old, live alone and have a master's degree and earn about $65,000 annually.

The loan payoff amount is about $5,900 and I current have about $19,200 saved up in the bank. The monthly payments on the loan are $94 with an interest rate of 6.80% and 7 years remaining on the loan. Even if I were to payoff this loan, I would still have another student loan outstanding (in the amount of about $10,000). My question is, is it a good idea to pay it off?

My reasons to pay it off now would be (a) the monthly payment will be converted to $94 in monthly savings, (b) my debt would be reduced by $5,900, (c) stop paying interest now and (d) there is no corresponding asset to this debt (i.e. a master's degree cannot be sold). In other words, it's just a matter of time before the damn thing must be paid off.

The potential things that are stopping me from paying it off, however, are (a) it will delay the purchase of a house by $5,900 that otherwise could go toward a downpayment, (b) I worry that payoff will negatively impact my credit score, because of less debt utilization.

Overall, I am most concerned that paying off this loan will harm my credit score, because it means that I would not be holding enough debt to build credit. With that said, I do have about 2-3 years of good credit history to date. But seriously...would credit bureaus dock me for paying OFF debt?!

Currently, I am renting an apartment and never owned a home, but would like to. But, seeing how I can only afford a house up to $180K, which doesn't buy anything great here in Connecticut, I am considering just putting the $5,900 toward debt payoff now instead of wishful hoping to afford a home in the near future. In CT, $180K will buy you a tiny, old ranch in a not so desirable area (usually on busy roads or squished between other tiny houses), and often need lots of updating and work. Ugh!

Thanks

To get this back on track...

Your credit score doesn't get better because you have debt. Your credit score is based on how you handle debt. I'd pay it off. In fact -- I'd consider paying off BOTH loans. Save you lots of money in the long run.

BUT it would depend on how much you save total. If you saved that 19K in tiny bits, it would be hard to make that grow again, but if you saved say 10-15% of your paycheck every payday as a matter of course, you'd be back up there in a couple of years. You'd also keep paying those school loan payments, just pay them to yourself. And when you went to buy a house, you'd only have a house payment... which is pretty darn good.

[dazzleman]

Originally Posted by Croye22

Well put. I feel bad for feeding him.

I bet the people who are saying that nobody should ever borrow for college went to school around 1970 and have no idea how much tuitions have increased.

I went to school in the 1980s and it was still possible then to mostly self-finance your own education through working summers and part-time. Today, it is impossible, hands down, without massive scholarships.

The original question simply involved whether a modest student loan debt should be repaid, or whether the OP should hold onto the cash instead and pay down the loan over time. That would have been a pretty easy question to answer without getting into all sorts of moral judgments.

If the OP had asked about how to default on the loan, or said he had $100,000 of credit card debt, had recently had a house foreclosed on, and wanted to know about how to get another house, then I could see the judgment. But not in this case.

[UrbanAdventurer]

I'll probably catch hate for this one, but if I were you I'd just pay off all the student loan debt and get it over with. To be honest, that $19 grand you scraped together is chump change in the larger scheme of things and really isn't doing much for you right now sitting in a bank account collecting 1%. Accomplish something worthwhile with it before it gets spent on something stupid like a motorcycle or a mortgage on a house that could likely lose value in the short run. Then it goes from an "investment" to a "boat anchor", and who needs a boat anchor at 26? (or any age)

Any strategy less aggressive than that to me is pointless.

[Dd714]

Originally Posted by glass_of_merlot

Wow, what a riduculous and judgmental thread. .

Judgemental thread? Wait, aren't you the nutcase that called the entire community here "racist bastards" for some race crimes that happened in the 50's?

what do you have to say for yourselves?

[mysticaltyger]

Originally Posted by dazzleman

I don't think it's worth it to lose 6% on the loan balance (the difference between what he's probably earning on the savings and the interest rate on the student loans) in order to help the credit score. That's the type of thinking the banks want us to have, so that they can grab onto larger chunks of our income. Better not to play by those rules, because they're not designed to help us.

That's what I was thinking. The OP still has another loan he/she is paying for, so the credit score will be fine.


OP: Just pay off the smaller, higher interest, loan and keep the rest of your cash in an emergency fund. You can pay a little extra toward the other loan over time when you have extra cash.

Also, you didn't say anything about 401K contributions...but one thing to think about is that you save 25% on taxes (or more) with the 401K contribution at your income level. But if you're already maxing out your 401, then this is not a factor.

[ashleywatson]

Not bad i think debt consolidation is good. This will be convenient to you to pay out easily your loan.