If you have student loans, chances are you’ve got questions about them.
Such as: should you try pay them off faster if you can afford it? Or should you focus on paying off your credit cards, instead? If you have late payments on your student loan record already or even a default, what can you do to salvage your credit rating?
We feature the questions above in this week’s round-up of Q&A activity on Mint Answers, along with some of the suggestions shared by the Mint community.
To read more answers or to chime in with your response, click on the links below.
Should I try to pay off my student loans as quickly as possible or extend the repayment over the entire period? I have heard it can be bad for your credit rating if you pay things off too quickly.
1. A student loan is an installment loan, which means the debt is having a very modest impact on your scores. Example, I paid off a $284,000 mortgage last year and my scores went up a whopping 4 points. I recognize the desire to be debt free and that’s fine. But, there isn’t a credit score issue here, one way or the other. Keep the debt, pay it off early…doesn’t really matter.
And guess what…FICO doesn’t know if you paid it off early or full term.
2. Leaving the credit score aside, in the current interest rate environment, paying off a student loan aggressively usually makes sense, because it would be hard to safely grow your savings at a comparable interest rate.
I am 21 years old and currently have $1,000 in total savings, $100 in investments and $80,000 in student loans. Currently have an Associate degree, going for a finance degree, which I plan to graduate with in 2012. I bring in around $4,500 in the summer working, but no income during the school term.
How should I start paying off my debt?
1. There are a bunch of questions you need to answer before you proceed.
What’s the interest rate on the student loans? Will you be able to consolidate at a lower rate after you graduate?
Will you be working in a field eligible for loan forgiveness?
Do you expect to earn a salary that will allow you to pay down your loans aggressively?
In any case, it sounds like you’re in no position to start paying off loans until after you graduate. And interest on the loans is probably deferred until then, anyway. You’ve amassed enough in loans that it
would be worth talking to a fee-only financial planner when you graduate. You can find one at Napfa.org.
2. $80,000 in student loans, and you have 2 more years before you graduate? And you are getting a finance degree? It sounds like you will have $160,000 before you are done, assuming you can find a lender over the next 2 years. That’s not a great way to start out your career.
I think it’s time to ask yourself whether the school you are attending and/or your major is worth the expense. Is it a private school? Are there other state options that are much cheaper? As great as it is to get a private school education (I did, and it cost me over $40,000 in loans), I think public schools can be just as good, depending on the area of study and whether your desired field requires an MA, MBA, or PhD, which would make where you received your undergraduate degree far less important.
I would consider looking into Officer Commissioning programs with the military. A finance degree would be of value, and it could actually enhance your resume as it shows service to your country, not to mention that they can help with generous financial aid.
I have student loans with three different lenders right now. They are now currently up to date (two of them paid a year in advance, one simply current because it was a no-interest loan). However, before I got my current job, my parents stopped paying and neglected to tell me before I started. During the non-payback time I was unemployed and actively job-searching, and could not pay them back. I wasn’t listed as deferred because I thought my parents were paying. So I became between 30 and 90 days late with the loans and it went on my credit report. I was recently turned down for my first credit card due to this (and also a lack of credit history).
I now make plenty to pay things back, but having a credit card would be helpful (having a wedding and honeymoon in just over a year) in getting a better credit history for when I switch to my own car insurance, and for getting miles for that honeymoon. (I have more than enough to pay it off in full monthly).
How do I go about convincing the credit bureaus to drop the late payment listings? Do I contact them directly, or do I contact the banks? Also, one of my loans had its lender transferred, do I talk to the one it was late with or the current one?
1. You won’t convince them of changing anything if you were a signer on the loan. Technically you promised to pay back what was borrowed with on-time payments, and the institution did not receive them when they were supposed to. That’s all they care about, sorry.
1. It depends on the interest rate and balance associated with each account. Generally speaking, you should pay off the account with the higher interest rate (keep in mind that as you miss payments it can often trigger more fees and interest rate spikes).
Another thing to keep in mind is that student loans are often secured debts that are more difficult to negotiate re-aging and fee-waivers on than credit cards.
2. Setting up a payment plan for the defaulted loan and sticking to it will help prevent it from constantly rearing back up as a problem. Then you can deal with the credit card debt alongside that. Get Sallie Mae on the phone, as awful as it sounds.
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