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Posted in Student Loans
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Question By
andrewfent

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I have $2,500 in student loan debt. Would it help my credit score to make payments or wipe it out?

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My similar scenario

Helpful to 31 out of 35 people

My last 2 student loan accounts totaled up to be around $5,000 while my credit scores averaged at 754. I recently wiped both accounts off in about 6 months, once I was stable with my new job.  With no other debts and no new loans, along with maintaining my credit card utilization at only 1% (only one percent), my score got to 778 since last month. Took me a total of over 10 years to wipe out my $22,000 total principal from 5 different accounts. 

I'm not advising anything. Just my personal experience. I'd rather have the fulfillment knowing that I don't owe anybody any dime rather than drag my monthly payments and risk a late payment or have the company take more than what I borrowed from interest each month.

If you have money to wipe it out, do it as fast as you can? Why let them earn interest out of your principal? Tax break won't make a difference at all on your 1098-T, but the feeling of owing money and dragging on from month to month is not worth it.

Reply by
lg5913

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Thank you so much for your sharing your personal experience.  While I will be happy my loan is finished, I was really afraid my FICO score would plummet.  I only have one other account and it is a credit card that has no balance.  When I have used it, I made payments on time, or paid it off within a few weeks of using it.  I've only had the credit card for just over a year.  With my student loan finished, the length of my credit history will drop to one year.  I guess we'll see what happens.  I was hopeing that some day I could buy a little place to live.

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Student Loan Debt is Evil

Helpful to 12 out of 14 people

Student Loan debt is generally not dischargable in bankruptcy, which means that it will always be there unless it is paid off. The tax break isn't worth it. Assuming you are in the 25% tax bracket, for every $100 you spend on interest you only save $25. You are still out the remaining $75.

While payment history is important to build credit I have found that it is pretty easy to build credit (and on-time payments) by using a credit card to pay for month-to-month expenses (such as cell phone, internet, etc). Earning points can pay-off big over time. For example, since 2007 I have been able to get over $400 cash back just by using my credit card. I pay it off every month in full. While the amount of cash back isn't much on a year-to-year basis, it is still money I didnt have before. They key is to pay-off the credit card every single month in full and on-time. I never wait until the due date to pay. I like being ahead of my bills and use mint.com to track all my expenses. If you can handle a budget well, using the same approach may be beneficial to you.

Disclaimer: I am not a financial planner/advisor. The views I am shaing are my own and you should consult a Certified Financial Planner or other licensed person for professional advice.

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Wipe it out!

Helpful to 7 out of 8 people

Debt is debt. Get rid of it as fast as possible!

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Pay it off if you can

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If you can pay it in full right now without causing financial hardship, do it. It won't help your credit score to keep it. The only factor that keeping it could help, would be in giving you even more good payment history and you can achieve that with paying your credit cards on time. Paying it off will also lower your overall debt which can actually improve your score. And you are also saving yourself money in interest by paying it off early.

I was stupidly contemplating keeping a small balance on my last student loan because Credit Karma only factors in open accounts in credit history, but it is important to remember that Credit Karma is not using a real FICO score or even calculating based on the FICO scoring model (it is using the Vantage Score model). FICO is what most lenders use.  I wrote a post on my blog about this exact thing after doing some research on FICO http://www.sociallyindebt.com/?p=222

I will be paying off my last loan next month.If you can pay it in full right now without causing financial hardship, do it. It won't help your credit score to keep it. The only factor that keeping it could help, would be in giving you even more good payment history and you can achieve that with paying your credit cards on time. Paying it off will also lower your overall debt which can actually improve your score. And you are also saving yourself money in interest by paying it off early.

I was stupidly contemplating keeping a small balance on my last student loan because Credit Karma only factors in open accounts in credit history, but it is important to remember that Credit Karma is not using a real FICO score or even calculating based on the FICO scoring model (it is using the Vantage Score model). FICO is what most lenders use.  I wrote a post on my blog about this exact thing after doing some research on FICO.

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9 People Helped

Pay It Off

If you can pay it in full right now without causing financial hardship, do it. It won't help your credit score to keep it. The only factor that keeping it could help, would be in giving you even more good payment history and you can achieve that with paying your credit cards on time. Paying it off will also lower your overall debt which can actually improve your score. And you are also saving yourself money in interest by paying it off early.

I was stupidly contemplating keeping a small balance on my last student loan because Credit Karma only factors in open accounts in credit history, but it is important to remember that Credit Karma is not using a real FICO score or even calculating based on the FICO scoring model (it is using the Vantage Score model). FICO is what most lenders use.  I wrote a post on my blog about this exact thing after doing some research on FICO http://www.sociallyindebt.com/?p=222

I will be paying off my last loan next month.

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Don't Push Your Budget

Helpful to 0 out of 1 people

If you can wipe it out comfortably, I would agree with everyone else. On the other hand, wiping it out might mean not having anything on hand for an emergency or another life goal. As long as you can continue to make the minimum monthly payments ( or higher if comfortable for your budget), student loan debt is not the worst kind to have on your record. It really depends on your situation.

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