Paid Off Your Student Loans? 5 Things to Do Next

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Paid Off Your Student Loans? 5 Things to Do Next

Congratulations! You've paid off your student loans, and that's a huge feat in itself. However, after completing such a momentous task, you may feel a little lost about what to do next.

If you recently paid off your student loans or are close to the finish line, here are five things you should do.

1. Get it in writing.

Once you pay off your student loans, you should receive a notice from your loan servicer that your loans are paid off.

Having this letter in a safe place could prove useful, as it may take a while for your records to be updated across the board. In addition, you'll have proof if anyone says you haven't paid off your loan in full. Put the letter with other important documents such as your birth certificate, Social Security card and passport.

If you don't receive a letter within a few weeks, follow up with your loan servicer to ensure you get a letter stating your loans are paid off in full.

2. Check your credit.

If you've consistently made on-time payments for a number of years, your student loans may have helped you build credit.

But once you pay off your student loans, they'll be considered closed accounts, which may lead to a drop in your credit score. I was surprised to see my credit score drop a few points as I continued to pay off my student loans, one by one. However, you may only see a small drop in your score, and your positive repayment history will still be included in your credit report.

Student loans are considered installment loans, which you pay over a fixed period of time. They're different from credit cards, which are considered revolving loans that can be used and paid off for an undetermined amount of time. By paying off your student loans, you could affect your credit mix, or the various types of credit you have -- which could impact your score.

In addition, paying off your student loans may affect your length of credit history, which is also a highly influential factor in some scoring models.

After a month or so, check your credit reports to verify that your student loans appear as closed accounts.

3. Build your emergency fund.

In life, unexpected things are bound to happen. Your car may break down, you could lose your job or you may be struck by illness. That's why an emergency fund is crucial to have.

An emergency fund can help turn an unexpected expense, such as a medical bill or cellphone replacement, into an inconvenience instead of a crisis.

Consider saving at least six months' worth of expenses -- such as your rent/mortgage, groceries and any necessary items, such as prescription copays -- so you can prepare for the unexpected.

"Emergency funds are extremely helpful and can protect you in bad times. It's always best to be prepared so that you don't fall into debt," says Michelle Schroeder, founder of personal finance blog Making Sense of Cents. Michelle paid off about $40,000 in student loan debt in seven months.

My emergency fund saved me from going into further debt. Over the years, I've used a portion of my emergency fund to pay for car repairs and a hospital visit. I slept better at night knowing that I had the money and didn't have to borrow more money to deal with an already difficult situation.

4. Allocate funds to other financial goals.

Aside from building your emergency fund, it's important to allocate your additional funds to short- and long-term financial goals. Let's say you used to put $400 per month toward student loans. Now that your student loans are paid off, that $400 can now be allocated elsewhere.

Consider dividing your extra money and saving for short-term goals, like travel, and long-term goals, like retirement and a down payment on a house, so you don't spend that extra money frivolously.

While it's understandable to loosen up a bit after you pay off debt, it's a good idea to start building wealth and protecting your financial future, not get back into debt.

5. Avoid lifestyle inflation.

As someone who has recently paid off student loans, I understand the feeling of wanting to buy everything you may have put off for years now that you're debt-free. While some lifestyle inflation may be inevitable or even necessary depending on what you cut out to get out of debt, you shouldn't completely upgrade your lifestyle.

For example, if you lived in a one-bedroom apartment, don't get a two-bedroom unless you need one. If you have a car that works perfectly fine, don't go out and buy a car just because you want a new one.

Keeping your current lifestyle and avoiding lifestyle inflation can help you build wealth. You've already proven you can pay off your student loans; now you can let your money work for you through saving and investing.

Bottom Line

Now is your time to rebuild and change the course of your financial future without those pesky student loans on your back. While it can be tempting to spend frivolously and enjoy your life without student loans, think strategically about how you can reallocate that money to help you build wealth in the long run.

About the Author: Melanie Lockert is a freelance writer and editor currently living in Portland, Oregon. She is passionate about education, financial literacy and empowering people to take control of their finances. Her work has been featured on Rockstar Finance, GoGirl Finance, The Globe and Mail and more.

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