Pay Off My Student Loans In Full or Make Monthly Payments?

Clodhopper · Aug 3, 2012

Since you have no other debt, getting rid of that one would be very beneficial. If you have been on time paying it, you already have a credit history, so paying it off early will not prevent you from building one. It never, ever, counts against you, credit wise, to pay a debt off early. Federal law guarantees that.

That said, if you wipe out your savings, you will leave yourself vulnerable for a major expense/crises until you save back several thousand again. While one poster cited coming down with a brain tumor as unexpected things that happen, a more likely crises could be something like "What if your car suddenly dies?" ... or needs a massive repair (mechanics are cash & credit card only). That sort of thing. Because of the need for a cushion, I would just make extra payments and hold on to the savings if it were me. Since you have decent savings, perhaps consider saving less/none right now (leave the $8K alone) and use what you would have socked into savings that month as extra payment towards the loan.

It will amaze you how fast a long term debt will pay down if you are just make ONE extra payment a year. If you can swing several extra payments (say, pay 1/3 more extra payment every month), that debt will be done in no time. Another way to look at is this: If the $ for extra payment were just saved, you are making probably 1% interest right now at a bank. The student loan interest is what, 5-6%? Regardless of the rate, every extra dollar you put towards paying off the loan, you effectively make 5-6% (whatever the actual rate is on the debt) in SAVINGS from avoided interest payments, verses the 1% the bank will give you with their savings account.

This really works. I paid 3 extra payments a year on a 30 year mortgage (cause I could swing it), paying it off in 12 years and saving over $180,000 in interest had I let the debt run its full term. The benefits of making extra payments lessen with small term loans, like 3-5 year for a car (to the point of not worth it to do), but are very material for about any debt whose term is greater than 10 years.

Stephalump · Aug 3, 2012

If an emergency does come up, which it very well may not, I'm sure you will have another way of financing it.

And this here is why I vote "Ask a professional" as the best advice.

You cannot be sure this anonymous poster could find another way to finance an emergency at all.

anotherone, BSN, RN · Aug 3, 2012

i vote number 3! you need money saved at least for almost a year of rent, car and utilities. nothing is stable . healthy and employeed today , sick, mergers and closures tomorrow. i would save money and pay off as much as possible now. $8,000 is a big chunk of money

rn/writer, RN · Aug 3, 2012

The trick is to preserve the greatest amount of options at the lowest cost. To that end, paying off half the loans and adding principle to the payments to amortize the rest sounds the safest and most practical route.

Another poster suggested paying everything off and keeping just $500 for a rainy day fund. $500 might cover a couple of drops, but you could find yourself really soaked if you came up against a serious car repair, a moderate illness, or a dead appliance. You're much better off if you can keep at least six months living expenses socked away and channel anything above that amount to retiring debts.

You are wise to be thinking about these things and working toward financial independence. You'll thank yourself many times in the years to come.

whitecat5000 · Aug 3, 2012

Thanks all for your input. I'm just gathering feedback before my meeting with my financial adviser. I'm not completely financially retarded. I have a 401K, EE bonds, savings, etc.

I do worry about having a financial security blanket. I had a family member admitted to the hospital in late December and he stayed until February. Two annual in network and out of network deductibles = financial ruin. $20,000 in bills in 30 days. That's a lot of money and I don't want that to ever happen to me.

I just wanted some input from other sources before I meet with my adviser and to see if anyone had any unusual/different ideas that I hadn't thought of yet. :)

Editorial Team / Admin · Aug 3, 2012

I think you're asking the wrong people. Find a financial adviser, or get some books on the topic. How do you know any of us know what we're doing with money?

Agree with this, but I'll include my own story here. I've been paying extra on my student loan. Now that I'm back in school, although the loans are in deferment, I'm still paying. However, I also recently had a major incident in my house- my basement partially flooded with raw sewage as a result of a broken sewer pipe. My insurance company will only cover the damage to the house (about $2,500, of which I have to pay my $500 deductible). The digging up the old sewer pipe and replacing the front porch and walk that had to be torn up to do it? Denied by the insurance company and denied again on appeal. So there's $9,000 I had to cough up, in addition to an increased homeowner's insurance rate since I now lose my no claims discount. Guess what? I didn't have much in savings because I was concentrating on paying down debt. Now, my savings is severely decimated, and a big chunk of that $9,000 ended up on credit cards. What I've learned is that emergency funds are there for a reason, and I'm working at building up another emergency fund (although I think I've had my fair share of needing it) and paying off the credit card, although at a slower rate than I was before this happened. No more extra money towards the student loans.

If I were in your shoes, I'd never wipe out the savings account. Keep enough for at least several months of expenses. Then, if you want, put the remaining extra towards debt. My main concentration is the credit cards- higher interest rate, not tax-deductible. At least student loans have some benefits compared to other debt.

klone, MSN, RN · Aug 3, 2012

Another poster suggested paying everything off and keeping just $500 for a rainy day fund. $500 might cover a couple of drops, but you could find yourself really soaked if you came up against a serious car repair, a moderate illness, or a dead appliance. You're much better off if you can keep at least six months living expenses socked away and channel anything above that amount to retiring debts..

This is premise of the Dave Ramsey plan (I misspoke, though, it's actually $1000, rather than $500).

Total Money Makeover is a great book. I recommend it to everyone who is looking for financial advice.

hiddencatRN, BSN, RN · Aug 3, 2012

This is premise of the Dave Ramsey plan (I misspoke, though, it's actually $1000, rather than $500).Total Money Makeover is a great book. I recommend it to everyone who is looking for financial advice.

I know he's very popular and I like a lot of his advice. But I've never had an "emergency" that was only $1,000. And if I lost my job tomorrow, that wouldn't come close to a months expenses. In this economy I think a larger cushion makes more sense.

Multicollinearity, BSN, RN · Aug 4, 2012

Having a minimum of 6-8 months of living expenses in the bank gives you mental and emotional freedom. You don't worry. You've prepared. If doomsday happens...you are laid off, or a job becomes intolerable to the extreme, you will be fine. You have choices.

sauconyrunner · Aug 4, 2012

I'd pay a lot extra on those loans, and eventually pay them off...at a very accelerated rate. You will necessarily establish credit if you buy a car, or rent or anything. But I tell you there is NOthing like getting that payoff letter in the mail.

Stephalump · Aug 4, 2012

I know he's very popular and I like a lot of his advice. But I've never had an "emergency" that was only $1,000. And if I lost my job tomorrow, that wouldn't come close to a months expenses. In this economy I think a larger cushion makes more sense.

The $1000 isn't his overalls recommendation, it's just his first baby step. I think it makes the assumption that you're incredibly in debt and if you'd just save a little and then pay off your debt, you'd have a ton of extra money to save what he'd really want you to have: 6 months worth of bills put away.

That's all well and good, but it isn't great if you don't have that much debt. My student loans are my only debt and they cost me 118/month. It would probably take me 2 years to pay them off in lieu of saving money and then I'd be left with $118 extra to save? Really not worth it if something big were to happen in the meantime and it costs more than $1000...and something definitely will.

RNewbie · Aug 4, 2012

Pay them half off so you have some savings and pay double payments every month. That way you will pay them off quickly and have emergency funds.

I agree. This is my exact advice. You do not want to wipe out your savings, so I think this would be your best option.