mrblue

I have about $14k in student loans. I'm about to graduate Grad school. I didn't pay anything during grad school since the loan is mostly subsidized (no interest while I'm still in school!). Anyway, I'm about to graduate in a month and I have the cash to pay off the entire loan at once.

I'd have enough money left over and a job lined up after I graduate, so I should have a decent cash reserve. I don't see any major purchases in the next year or so. May want to get a house, but that won't be for at least a year or two. Does it make sense to go ahead and pay off the loan all at once?

ibis

No, no, no. your subsidised loans are a very low interest rate.

If you can invest your cash at any rate over what your paying for the loans do it.

Right now I recieve more financial aid then I need. So I invest the excess cash and make a few points.

Plus, if you pay over time, and you keep your investments liquid, you'll have cash incase of an emergancy.

onetime2

Do you have other debt? Credit cards? How much credit have you established? When buying a house they're going to look for your history of paying off loans over time. If you don't have much, keeping up with the student loan payments will help. Additionally, it takes a load of money to buy a house. If you plan on buying one in as little as a couple of years, hold onto that cash. Put it in a CD if you want to assume little risk or some other form of investment if you're less risk averse.

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mrblue

No other debt besides the student loans. Bought my car w/ cash. I have a couple of credit cards, about $10k limit on each of em (started low of course, but have always paid on time so they kept boosting it). I havn't had a reason to look at my credit score (checking it costs like $15 and it probably hurts it), but I would guess it's pretty high.

Kind of figured it might make sense to hold onto the student loan at it's low interest rate, but then I've got to make sure I can invest the money at a greater return than the interest on the loan.

In terms of my credit score, does having some continuing debt look better than having no current debt because I paid it all off?

onetime2

I'm no expert on how they determine credit score (there are others on the board who apparently are) but I do know people that were turned down for loans because they did not have sufficient credit histories despite the fact that they paid their debt off quickly whenever they developed it. They also had a tendency to pay for things (like cars) in cash and it seemed to hurt them. It was almost like they were just beginning in the world of finance despite being in their 30's and living a very comfortable life. It seem that sometimes having no significant history of paying things off over time hurts since the credit companies can't predict how you will be at it.

Just my .02.

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NoSoup

Yep, exactly right. You are basically comparing apples and oranges here mrblue. If you decide to keep the student loan, you shouldn't do it to build credit. Keep it because you feel more comfortable with the cash, because you can make a higher rate than you are paying, or because you like the tax consequences.

However, if you are looking strictly into building credit, I would suggest charging some things on your card(s) each month and paying the balance off in full. Do not charge higher than 50% of your credit limits, though. Another option would be to take out a secured loan or an automobile loan. You'll pay a bit in interest, but it very well might save you much more money on more expensive purchases down the line.

Credit Reporting agencies like to see people with no to low debt, as long as they are still utilizing credit. The people that scare them are the people that either don't currently or never have had companies lend them money. Credit history is merely the habits of paying back money, the longer the history, the better the score.

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Just in case you were wondering...

Flyguy

PAY IT OFF!!!!!! I sure as hell would. I don't see why you should keep any debt if you don't have to. If you want credit history then put your monthly bills on your credit card and write a check at the end of the month. You already have to money for your regular bills anyway.


By the way, you're VERY lucky to be able to pay off your student loans all at once. I hope I'm just as fortunate.

ibis

Debt is not a bad thing - especially student load debt.

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My own assumption:
I would actually bet Graduate loans are pretty attractive to lenders. If you have student loans, you must have an education. Therefore likely to have a good job.
***

Don't be scared of debt. $14k isn't much. I've got $15k and have 2 years left in my undergrad.

Flyguy

I'll admit, that's one way of looking at it. But I just see debt as something hanging over your head, something you want to get rid of as fast as possible. And even if you pay it off, it'll still show up on your credit report as having had a student loan and creditors can still see it.

basmoq

I have $30K in student loans, but I'm only a senior, and I have 5 years of med school to go... I'm not even worrying about loans or paying them off, my goal is just to get through med school and it's all gravy from there

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Bamrak

If your investments and the market takes a dive.. your student loans will still be due, and the government won't play..
Why would you want to have Uncle Sam hanging over your head?

I say pay it off, the few dollars you might gain in interest of something that isn't guaranteed would be easily offset by the fact that you don't have the loan over your head.

ols

well as long as you still owe money, they wont let you die. think about that lol

brianna

my uncle is a finacial planner and this was his reply when i asked him if i hsould try to pay off my student loans:

no. if you have extra money make sure you have no credit card debt, then if you still have money left pay off your car, then look into buying a house, then invest, then buy yourself something nice, then if you still have money and you feel like it you can pay off your student loans.

ccvirginia

Student loans are "cheap" debt. If they are only at 4-5% you could put your money to work for you in a decent mutual fund or maybe start an IRA with some of the money.

If you have plenty of cash and think you'll have a 20% down payment for your home in about a year then go ahead and pay them off.

zandor45w

having purchased a home not long ago, my lender told me that paying off my discover card every month in full for the last nine yrs didn't help out my credit score nearly as much as paying 1 yr on my student loan. Keep the cash and buy the house. If you have more than 20% down then you won't have to pay morgage insurance.

lemans

Student loan is a actually a good type of debt. This debt goes towards your education and the interest rate is low. Before I'd pay that loan, I would pay off any credit card debt or any other type of debt.

saru

you might want to think of this decision as return on investment of your current cash: either you "invest" the cash into your debt and "earn" the rate of interest on the debt which you no longer have to pay. or, you invest in another asset e.g. mutual fund or house and earn the return on that asset. debt, esp. student loan debt, is pretty cheap these days, so you can probably make a better return by investing in other assets. plus, i seem to recall that interest paid on student loans are tax deductible up for individuals up to a certain income. i guess that makes the psychological pain of having debt on your books a little less.

its actually a nice situation. the only really un-advisable move would be to sit on the cash and watch inflation takes its toll.

Merlocke

I'd have to agree with Saru and the rest of the folks that say - hang onto the Student loan. It's a great debt to have on your side. Just invest wisely, and you'll come out ahead.

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