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How to pay off student loan

HiToWaMomHiToWaMom 1486 replies19 threads Senior Member
My D is senior in college and she will have $19,000 student loans when she graduates. My husband and I will be paying it off for her.

Which is the ideal way to pay it off?

1. Pay it off all at once. We will be able to pay it off using our savings. It will temporarily lower our savings but we can build up from there and I don't want to pay the interest.

2. My husband thinks paying it off over the course of several months will give my daughter a better credit history. (even though we will be paying interest) I'm a little skeptical about this one.

I appreciate your advice.


edited July 13
23 replies
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Replies to: How to pay off student loan

  • HiToWaMomHiToWaMom 1486 replies19 threads Senior Member
    Thanks for your reply.

    It's in the regular savings account. So the interest we pay to the loan (if we choose to pay over the course of several months) will be much bigger than the interest we gain from the bank.

    I guess that answers the question!

    Somehow my H always argues with me about building her credit.

    Thanks.
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  • brantlybrantly 4322 replies78 threads Senior Member
    The only other thing I can think of is if you think you might need cash in the bank for something else. Home emergency? Period of unemployment?

    Tell her to get a credit card to build her credit. Buy something small on it every month. Pay it on time.
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  • kelsmomkelsmom 16162 replies99 threads Senior Member
    Assuming she has not used her grace period, she has 6 months before her loans go into repayment. Subsidized loans should be paid off before the end of the 6 months to keep any interest from kicking in. Unsubsidized loans should be paid as soon as possible, because interest has been accruing since the loan funds were disbursed. At the very least, pay off the unsubsidized loans before the end of the grace period ... the interest will capitalize the second the grace period expires.

    If you really feel it’s important to build her credit with loan repayments, just keep a little unpaid. Before the grace period ends, you can decide which loans to repay (you don’t have that luxury once they go into repayment). Pay off all but a bit of the most recent, lowest interest rate loan if no subsidized loans ... if she has any subsidized loans, pay off all but a bit of the subsidized loan with the lowest interest rate (regardless of when it was borrowed). But I think just paying it all off at once is the best way. You are doing a great thing for her!!
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  • twoinanddonetwoinanddone 24994 replies20 threads Senior Member
    Credit scores are a combination of things, and the more she has, the quicker her score will go up. Checking account, savings account, a mortgage, a credit card, a car loan, a student loan, etc. The best and easiest is to get the checking and savings accounts. Next the credit card. She should never have a balance at any time in the month for more than 30% of the credit line. If she needs to buy something that uses up the credit limit, just pay it immediately. It's okay to make several payments during the month. My daughter used to do this with airline tickets

    When D first graduated, she only had a low limit credit card because she needed it before she started working. She also got a car loan but I was on that loan because I got a much better rate. Her score used to go up and down, from 690, down to 635, back up. Within 2 years of graduation it is now in the mid 700's. My score also went up because she paid that car loan off quickly, and since I don't have a car loan, it was a new type of credit so up mine went too.

    One note on the student loans...Nancy Pelosi included a $10k forgiveness of federal student loans in one of the stimulus packages. I don't think it was in the last one that passed the house (HEROS), but I'm hoping it reappears. My daughter just moved, sold the car, and has some extra cash and was planning to pay off the student loan. I advised she hold off to see if she might benefit. Worth the interest payment for a few more months.
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  • Eeyore123Eeyore123 2088 replies25 threads Senior Member
    @twoinanddone checking and savings accounts don’t impact your credit score or is it on your credit report. That is why it is called a credit score and not a savings score.
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  • collegemom3717collegemom3717 8040 replies85 threads Senior Member
    Have her get the intro level credit card and put a regular monthly bill on it (collegekid 1 started with her spotify account on hers). Agree with the others that a good credit history builds up pretty quickly: collegekid2 got her first solo credit card when she finished college and started grad school (she has a regular stipend that counts as an income). The credit limit was something like $500 to start, but 18 months later had built up enough credit that she was able to get a mortgage on her own. Yes, STEM grad stipends are pretty good but mostly housing in the area is *super* cheap,, and the place she bought is teeny tiny- but still - now she's building equity & her credit rating.
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  • twoinanddonetwoinanddone 24994 replies20 threads Senior Member
    Eeyore123 wrote: »
    @twoinanddone checking and savings accounts don’t impact your credit score or is it on your credit report. That is why it is called a credit score and not a savings score.

    It's been a number of years since I was in the weeds of the credit score systems (and there are many more than the three main ones), but the programs we used did give points for things like savings accounts and checking accounts. Not for the amount in them, but just the fact that you had the accounts. Creditors like people who are in main stream banking. Maybe all the systems didn't care about deposit accounts, but ours did and we had a lot of 'unbanked' borrowers. There were also more points for some types of loans (car, mortgage) and some loans (like 90 days same as cash) were not so great for your score. You know the companies that let you split the payment into 4 payments like QVC? Not a "good" loan.
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  • BelknapPointBelknapPoint 4985 replies19 threads Senior Member
    It's been a number of years since I was in the weeds of the credit score systems (and there are many more than the three main ones), but the programs we used did give points for things like savings accounts and checking accounts. Not for the amount in them, but just the fact that you had the accounts. Creditors like people who are in main stream banking. Maybe all the systems didn't care about deposit accounts, but ours did and we had a lot of 'unbanked' borrowers. There were also more points for some types of loans (car, mortgage) and some loans (like 90 days same as cash) were not so great for your score. You know the companies that let you split the payment into 4 payments like QVC? Not a "good" loan.

    Eeyore 123 is right. Checking and savings accounts have no impact on credit scores or credit reports.
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  • HiToWaMomHiToWaMom 1486 replies19 threads Senior Member
    OP here. Very helpful information about building credit. Thanks, everyone.
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  • twoinanddonetwoinanddone 24994 replies20 threads Senior Member
    Eeyore 123 is right. Checking and savings accounts have no impact on credit scores or credit reports.

    Well they did for the system we used to make loans. I've worked in lending and banking for 40 years. Not everyone uses Equifax.

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  • BelknapPointBelknapPoint 4985 replies19 threads Senior Member
    Well they did for the system we used to make loans. I've worked in lending and banking for 40 years. Not everyone uses Equifax.

    Neither Equifax, Experian, nor TransUnion looks at checking or savings accounts when compiling a credit report or calculating a credit score. Maybe when you were "making loans," a checking or savings account history or balance was one of the factors considered in determining credit worthiness, but again, checking and savings accounts have no impact on credit scores or credit reports. If you disagree, please tell us which credit score or credit report does consider checking and savings accounts.
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  • thumper1thumper1 78500 replies3537 threads Senior Member
    @HiToWaMom

    IIRC, the federally funded loans are not accruing any interest right now due to Covid 19. In addition, loans are not required to be paid right now. This ends at the end of September.

    https://studentaid.gov/announcements-events/coronavirus

    With regard to how you should repay...we repaid college loans and did it in our own time...based on cash flow. We still had a kid in college when kid one graduated, so it took us a little longer to repay because our current income was being used for kid 2 college costs.

    Kid 2 is now done with school. Loans are in auto forbearance. We are paying anyway with the intention of having this all paid off (undergrad only) by December.
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  • bluebayoubluebayou 28076 replies209 threads Senior Member
    edited July 15
    It depends on what your $19k is doing/for. If its part of your emergency fund, then I might pay off school loans a little more slowly, based on your own cash flow as Thumper did. With COVID, few jobs are secure.

    (we did something similar -- coulda cashed out some investments and paid off the loans right after graduation, but chose to keep our investments intact -- and avoid cap gains taxes -- and pay the loans out of monthly cash flow.)

    OTOH, if your $19k is savings and just sitting in a passbook account earning near zero interest, pay off the loans any time that you can. The interest saved on the school loans is equivalent to a guaranteed investment return.
    edited July 15
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  • SybyllaSybylla 5096 replies61 threads Senior Member
    If you had the money, why take out the loans? Am I missing something?
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  • brantlybrantly 4322 replies78 threads Senior Member
    Sybylla wrote: »
    If you had the money, why take out the loans? Am I missing something?

    People take out loans even when they have the money because, instead of handing over the money with the tuition bill, the money could be working for them elsewhere. If they pay the accumulating interest throughout the four years and pay off the loan during the grace period, it's usually a win.
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  • SybyllaSybylla 5096 replies61 threads Senior Member
    edited July 15
    "it's usually a win."

    Maybe you could break down the interest and the fees cost and make that into an APR for me? Because non sub loans still have fees and costs that have never been exceeded by anything safe IME of looking (I have a 2015 kid as well as later) and a cumulative 19 K over 4 yrs isn't really stock market play money.
    As op says " I don't want to pay the interest." maybe this is some kind of interest fee loan I don't qualify for?
    edited July 15
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  • twoinanddonetwoinanddone 24994 replies20 threads Senior Member
    Neither Equifax, Experian, nor TransUnion looks at checking or savings accounts when compiling a credit report or calculating a credit score. Maybe when you were "making loans," a checking or savings account history or balance was one of the factors considered in determining credit worthiness, but again, checking and savings accounts have no impact on credit scores or credit reports. If you disagree, please tell us which credit score or credit report does consider checking and savings accounts.

    Credit Reporting Agencies

    There are nearly 40 credit reporting agencies in the U.S. But just three of these so-called credit bureaus dominate the market: TransUnion, Equifax and Experian.

    ...

    TransUnion, Equifax and Experian [u[joined forces in 2006 to create a new type of credit score: the VantageScore.[/u] It was designed to compete with the Fair Isaac Corporation’s FICO Scores.
    ....

    Experian, Equifax and TransUnion aren’t the only credit reporting agencies on the block. There are tens of other companies – big and small – that are active in the space. Most have carved out a niche for themselves, from tracking rent and utility payments to monitoring checking-account management and insurance consumption.

    We used a credit scoring system that was based on the Fair Isaac system (and yes it was before 2006) but had also been tweaked for our special lending needs. Yes, we cared if our borrowers had savings and checking accounts, if they had a lot of revolving credit outstanding, and if they'd filed bankruptcy in the last 3 years. Those weren't deal breakers, but we needed to consider the info. The scores issued by the Big 3 (although they were different at the time and used a different scoring system) didn't work for us and didn't help us make lending decisions. The system we used ranged from 0 to 550, and our sweet spot for our borrowers was about a 175. I had to deal with those credit reporting agencies all the time because they did pick up information on our loans and frankly, they were a PITA and couldn't make corrections that lasted more than 2 billing cycles. Two months would pass and I'd have to contact them again.

    It is like on CC - not everyone is going to Harvard so not every school collects the same info. Not every lender is Wells Fargo. We wanted different information. Fair Isaac scoring still exists.
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  • BelknapPointBelknapPoint 4985 replies19 threads Senior Member
    Fair Isaac scoring still exists.

    Right, Fair Isaac = FICO (Fair Isaac Corporation). You were using checking and savings account information because the system had been "tweaked" for your "special lending needs."
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  • HiToWaMomHiToWaMom 1486 replies19 threads Senior Member
    OP here.

    Below is more detailed situation:

    $19,000 is all direct subsidized loan, so there is no interest accumulating now.

    We can do without borrowing but it will lower our savings to under the 6-month-worth of income emergency fund threshold.

    After graduation, we can still save 6 additional months during the grace period and we can pay if all off without interest.

    This will indeed lower our savings to under the threshold. However, since we don't have to save for tuition anymore, we can build the emergency fund quite fast.

    My husband is a bit worried to go down the threshold. (and he believes paying little by little will build her credit history)

    I say pay it at once even though we will be under the threshold for a few months (maybe 4 to 5 months.)
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