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Repaying Student Debt for Maximum Creditworthyness

ChrisDudeChrisDude Registered User regular
Hello H/A, I couldn't (easily) find an answer to this online so here I am! I have about 20k in student debt that I'm repaying little by little. It's broken up into 4 groups, 2 with about 6k and 2 with about 4k. My grandmother recently passed and left me 10 grand to put toward my student debt. I'm planning on paying down the two groups with the highest interest rate, but my question is: will totally paying down one of the groups increase my credit rating? I've got pretty good credit already but of course it's always nice to make it even better. I'm pretty sure I've noticed on previous credit reports that they're all separate loans, so closing them off as paid would make the scores go up, yeah? Also, will doing that lower my student loan payments since I won't be paying nearly as much in interest?

Chris Pennell Is A Huge Nerd - My blog. I talk about nerd-ish things a lot.

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  • DjeetDjeet Registered User regular
    Pay on time and pay them down as quickly as you can. That's the only thing that figures into your credit score with respect to debts. Debts are different from lines of credit. Pay down the higher interest debts 1st so as to minimize the amount you pay in total interest. The minimum payments won't change based on how much balance you pay off, but the number of minimum payments you have to make will go down, and as you pay off balances you won't have to make payments on those accounts anymore so you could say your payments go down since you've paid off the obligation.

    If you don't have any savings you might consider keeping some of the inheritance for a cushion or for emergency purposes (e.g. car repairs or medical expenses).

  • AngelHedgieAngelHedgie Registered User regular
    The first thing, if you don't have this already, is to build up an emergency fund of about $1k. The peace of mind this will give you cannot be underestimated.

    Your minimum payment will go down when you pay a loan in full, as loans are organised to provide revenue over time (this is why some banks have early payoff penalties on their loans - make sure that your loans don't!)

    XBL: Nox Aeternum / PSN: NoxAeternum / NN:NoxAeternum / Steam: noxaeternum
  • schussschuss Registered User regular
    Also - Make sure to take the amount you WERE paying on the other loans and roll it into your payment on the loans that remain. This will pay off the remaining loans far faster than scheduled and put you in good shape. It's generally easiest to pour your attention on one loan at a time, as you'll reduce your total number of loans faster.

  • JasconiusJasconius sword criminal mad onlineRegistered User regular
    ChrisDude wrote: »
    Hello H/A, I couldn't (easily) find an answer to this online so here I am! I have about 20k in student debt that I'm repaying little by little. It's broken up into 4 groups, 2 with about 6k and 2 with about 4k. My grandmother recently passed and left me 10 grand to put toward my student debt. I'm planning on paying down the two groups with the highest interest rate, but my question is: will totally paying down one of the groups increase my credit rating? I've got pretty good credit already but of course it's always nice to make it even better. I'm pretty sure I've noticed on previous credit reports that they're all separate loans, so closing them off as paid would make the scores go up, yeah? Also, will doing that lower my student loan payments since I won't be paying nearly as much in interest?

    Student loans are non-revolving credit, so it's looked upon a little bit differently than, say, credit cards, where carrying a high balance is decidedly bad and paying them down has a significant measurable impact on your credit.

    Paying off a student loan in full will show creditworthyness, but it will not exactly be a tidal wave of good will on your score. More like a "congratulations, you didn't fuck up".

    Still, paying them off ASAP is good for you overall.

  • bowenbowen How you doin'? Registered User regular
    Student loans also come with some good things, the interest you pay on them is deductible from your income taxes (within a certain amount of income). You may not want to pay them off, just keep paying them.

    Student loans still in good standing usually do not affect your credit in a bad way.

    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • ChrisDudeChrisDude Registered User regular
    Thanks for the help everyone. I think what I'm going to do is pay off one higher interest group from my student loans and put the rest toward the bit of credit card debt I have. Thread over!

    Chris Pennell Is A Huge Nerd - My blog. I talk about nerd-ish things a lot.
  • Jam WarriorJam Warrior Registered User regular
    edited January 2014
    Woah! You say thread over, but is that credit card debt at a higher rate then your student loans? Card debt is usually one of the first things to be dumping if you have a windfall to put to debt reduction as the interest rates are often at the much higher end of the scale.

    Plus loan minimum repayments are set up to eventually pay off your debt. Card minimum payments are set up to keep you in debt forever.

    Unless the card debt is on low interest rate somehow, I'd be paying off the card debt in full and putting the rest to student loans, not the other way around.

    Jam Warrior on
    MhCw7nZ.gif
  • zepherinzepherin Russian warship, go fuck yourself Registered User regular
    Woah! You say thread over, but is that credit card debt at a higher rate then your student loans? Card debt is usually one of the first things to be dumping if you have a windfall to put to debt reduction as the interest rates are often at the much higher end of the scale.

    Plus loan minimum repayments are set up to eventually pay off your debt. Card minimum payments are set up to keep you in debt forever.

    Unless the card debt is on low interest rate somehow, I'd be paying off the card debt in full and putting the rest to student loans, not the other way around.
    Even if by some quirk of credit the credit card debt is slightly lower than the student loan interest you still pay the CC off first. Student loan interest is an above the line tax deduction.

  • bowenbowen How you doin'? Registered User regular
    zepherin wrote: »
    Woah! You say thread over, but is that credit card debt at a higher rate then your student loans? Card debt is usually one of the first things to be dumping if you have a windfall to put to debt reduction as the interest rates are often at the much higher end of the scale.

    Plus loan minimum repayments are set up to eventually pay off your debt. Card minimum payments are set up to keep you in debt forever.

    Unless the card debt is on low interest rate somehow, I'd be paying off the card debt in full and putting the rest to student loans, not the other way around.
    Even if by some quirk of credit the credit card debt is slightly lower than the student loan interest you still pay the CC off first. Student loan interest is an above the line tax deduction.

    This.

    Unless OPs credit is 850 there's no way his credit card APR is lower than the interest on his student loans, even if he's got shitty private student loans from Sallie Mae.

    Pay down all of your credit card debt first. Then pay off all of your private student loan debts. Then, whatever is left over, pay of the rest of your federal loan debts.

    If you're in deep waters with financials already, my advice is different, but that's how you do it when everything is peachy keen.

    As @Zepherin says, student loans are an above the line deduction on your taxes, the interest anyways. So when you make a payment to interest on the student loan debt, you get to deduct that from taxes you paid plus the standard deduction you get for everything else. So of all the debts to pay off, student loan and mortgages should be the last. They're "good" debts.

    Obviously some are less good than others, which is why you pay off the private loans first. "Why?" you ask. Well, because private student loans have far less protections than federal loans. If you lose your job, typically you can put your federal loan on hold indefinitely. If you don't get a job for 10 years, typically the loan is forgiven (this is a new rule I think actually). Private loans, if you lose your job? You are fucked. Some creditors are okay, some will work out repayment plans, but if you're like most students, and you do have private loans, there's about a 98% chance you have Sallie Mae, and they will ass fuck you sideways until you bleed money. It doesn't matter if it's impossible, it'll happen. Shit they'll try to put liens on your vehicles or whatever the fuck they can get their hands on.

    So, find out if you have private loans, trust me, you'll want to know. Typically the dead giveaway is if the group has a >7% interest rate on it. But that's not always guaranteed.

    If you are in deep water financially, typically you'll want to pay off private student loan debt first, then federal, then credit card. Credit card debt is dischargeable in a bankruptcy.

    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • CycloneRangerCycloneRanger Registered User regular
    edited January 2014
    bowen wrote: »
    zepherin wrote: »
    Woah! You say thread over, but is that credit card debt at a higher rate then your student loans? Card debt is usually one of the first things to be dumping if you have a windfall to put to debt reduction as the interest rates are often at the much higher end of the scale.

    Plus loan minimum repayments are set up to eventually pay off your debt. Card minimum payments are set up to keep you in debt forever.

    Unless the card debt is on low interest rate somehow, I'd be paying off the card debt in full and putting the rest to student loans, not the other way around.
    Even if by some quirk of credit the credit card debt is slightly lower than the student loan interest you still pay the CC off first. Student loan interest is an above the line tax deduction.

    This.

    Unless OPs credit is 850 there's no way his credit card APR is lower than the interest on his student loans, even if he's got shitty private student loans from Sallie Mae.

    Pay down all of your credit card debt first. Then pay off all of your private student loan debts. Then, whatever is left over, pay of the rest of your federal loan debts.

    If you're in deep waters with financials already, my advice is different, but that's how you do it when everything is peachy keen.

    As @Zepherin says, student loans are an above the line deduction on your taxes, the interest anyways. So when you make a payment to interest on the student loan debt, you get to deduct that from taxes you paid plus the standard deduction you get for everything else. So of all the debts to pay off, student loan and mortgages should be the last. They're "good" debts.
    A clarification--student loan interest is deducted from your income, not your tax liability. Each dollar of student loan interest paid reduces your tax expenditure by (1*your_marginal_tax_rate).

    CycloneRanger on
  • Inquisitor77Inquisitor77 2 x Penny Arcade Fight Club Champion A fixed point in space and timeRegistered User regular
    Order of Loan Priority:

    1) Loan Shark/Mob
    2) Pay Day Loan
    3) Credit Cards (minimum payment)
    ...
    596) Student Loans


    OP, if you want a meaningful answer, you may want to provide a more detailed accounting of your (liquid) assets and debts. It's relatively straightforward to prioritize one debt over another, but it sounds like you have a lot more going on than just, "Should I pay off my student loans early?"

  • ChrisDudeChrisDude Registered User regular
    Basically, the other half of the windfall that I'm not using on the student loan will totally pay off my credit card debt, that's why I was so quick to declare that's what I was doing, haha. I'm well aware the credit card debt is the worst thing that humankind has ever conjured up, that's why I keep mine small. The student loan debt is all through government Stafford loans, two with lower interest rates (about 3%) and two with a little higher (about 6%). Those two things are the only debts I have (which may shock you, but it's true!), and I'm doing fine financially otherwise. Mostly I was just checking to see if paying off student debt actually helped bolster your credit scores a bunch.

    Chris Pennell Is A Huge Nerd - My blog. I talk about nerd-ish things a lot.
  • zepherinzepherin Russian warship, go fuck yourself Registered User regular
    ChrisDude wrote: »
    Mostly I was just checking to see if paying off student debt actually helped bolster your credit scores a bunch.
    Not really, what it does boost is your debt to income ratio, which many banks view as more important than your credit score.

  • bowenbowen How you doin'? Registered User regular
    zepherin wrote: »
    ChrisDude wrote: »
    Mostly I was just checking to see if paying off student debt actually helped bolster your credit scores a bunch.
    Not really, what it does boost is your debt to income ratio, which many banks view as more important than your credit score.

    Well, a few months after paying off any loan will boost your credit score too. Something to do with worthiness. Credit Cards don't really get the same treatment as full on unsecured loans.

    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • zagdrobzagdrob Registered User regular
    ChrisDude wrote: »
    Basically, the other half of the windfall that I'm not using on the student loan will totally pay off my credit card debt, that's why I was so quick to declare that's what I was doing, haha. I'm well aware the credit card debt is the worst thing that humankind has ever conjured up, that's why I keep mine small. The student loan debt is all through government Stafford loans, two with lower interest rates (about 3%) and two with a little higher (about 6%). Those two things are the only debts I have (which may shock you, but it's true!), and I'm doing fine financially otherwise. Mostly I was just checking to see if paying off student debt actually helped bolster your credit scores a bunch.

    Yeah, sounds like you are in good shape.

    If you have no debt other than your student loans, you have some savings, and won't be taking on other higher interest debt in the foreseeable future, pay off one of your 6% loans completely and put the rest into the other 6% loan. If you have any 6% debt remaining, keep paying the same amount monthly you would be paying now with all four loans, but put minimum payments into the 3% loans and everything else into the 6% loan.

    After the 6% loans are gone, keep paying the same amount as your current monthly payment (or at least as much as you can afford) and make the minimum payment on the larger of your 3% loans and put the rest into the smaller 3% loan.

    In my experience, and I'm not sure if it's changed, regardless of the amount owed, each Federal loan will have a $25 / 50 minimum monthly payment. It will be a small boost to your credit if you concentrate on one loan at a time, since the minimum monthly payments for all your loans will be a bit smaller if you pay off one loan completely vs. lowering your total balance among all loans.

    Just be aware of your upcoming expenses. If you're going to be buying a house or car in the near future, that $10,000 may be more beneficial going towards a down payment on your house (if you can't get a 20% down payment otherwise) or going towards a down payment on the car loan. Or, if your car breaks down and you need to put $4,000 on a credit card for repairs.

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