saving and paying off student loans simultaneously

[breathemusic]

Hi all. I wanted to run my current situation by you all and get some opinions.

I'm 25 and currently the only debt I have is student loans. But I've also been working on building up my savings for a future house fund. I wanted to get some thoughts on the balance between potentially paying down student loans early vs saving.

I have a citibank student loan (technically it's 4 small loans that I never consolidated but they just send me 1 bill for all 4). The loan payment is pretty tiny, only about $75 a month for all 4, but it's a 20 year loan or some such nonsense. Right now I'm making an extra $25 payment per month just to round it up to $100.

On the other hand, I also make enough that depending on the fluctuation in my spending, I can sock away $1200-1500 a month in savings (I've already maxed my Roth IRA and I put 10% into my TSP and get a 4% match, so that's not an issue)

Anyway, I'm wondering what's a good balance between paying off my citibank loan early (current balance is $11,650 @ 3% variable interest) vs working on building up my "house fund."

I know that even 3% interest on my student loans is more than the wimpy <1% interest I'm getting in my online savings. But at the same time, it seems to me that there's a certain amount of opportunity cost that comes with throwing all my extra money at the student loan and not working on building up funds toward a future house. I live in DC, so when the time comes that I want to buy, a downpayment will be pretty significant amount of money, which takes time to save up for. I'm not even really sure when I would want to buy a house, only that I know it will happen eventually when I'm tired of saving money through lower cost group housing. And I don't want to decide that I want to buy, and then realize that I should have been saving all along and now it will take me years to do so.

On top of that, since I don't have a mortgage, or a car loan, or anything like that, isn't it actually helping my credit some to have at least 1 loan that isn't for that much on my credit? Especially given that the house utilities are all in the landlord's name. My credit is already good (averages about 775 last time I checked). But I'm wondering if having zero loans on my credit report would potentially lower my score some, which could matter in the future when I want to buy a house. Or would the difference be insignificant?

Thoughts?

[bjl584]

I think that I would just stay the course. Pay a little extra on the loans as you have been doing, at least for now. Since you have retirement accounts that you contribute to you can focus your extra money toward a house.

Your credit score should be fine with only the one loan on it. I doubt it will drop to a level that would prevent you from being able to buy a house, but you could always use a CC for daily purchases and just pay the bill off in full each month. That will help maintain your score.

[breathemusic]

Thanks! That's kind of what I had been thinking. And I do have several credit cards/store cards and at least a cell phone bill that all get paid in full. I just didn't know if paying off my student loans early, which would remove all loans from my credit report, would hurt me.

I'm not really worried that I won't be able to get a loan at all, but I would like to try and keep my credit score high enough that I can get a better interest rate at least.

[bjl584]

I just didn't know if paying off my student loans early, which would remove all loans from my credit report, would hurt me.

If you pay it off really early, like in a lump sum payment, it may drop your score temporarily. I'm not sure of the mechanics as to why, but my StepDad and my Mom paid off the rest of their mortgage in one lump sum payment of around $25K a few years ago, and his score took a hit for a while.

[dczech09]

Hi I am in a similar situation as you (25 yo, working, student loans, no other debt, saving for retirement, want to build a house fund, etc).

To answer your question regarding your credit...
When you pay off the student loan, you will be debt free. If you are debt free and have no activity on your credit for so long (like a few years or so) your FICO will eventually be reduced to 0. This is not a bad thing. This just means that there is not enough information for the algorithm to formulate a score.

So if you want to buy a house with a 0 credit score, you will need to find a lender who actually does underwriting. A lot of banks today simply look at FICO and nothing else. There are others who will actually consider your lifestyle, and make a lending decision based on factors such as employment, income, stability, etc. They will also base the interest rate on such information.

You could use a credit card for daily things and pay off the balance immediately. If you take this route, you just need to be extra careful not to forget to pay. I have a corporate credit card for work, so my employer has whipped this practice into my head to handle expense accounting. This can help you maintain your credit score though.

Personally, I will be paying off my loans within the next two years. In fact, I have a positive net worth, so I COULD pay off my loans immediately if I want. But my loan rates are low and I like having the money

[breathemusic]

I have several credit cards that I use and pay off regularly so I don't really have to worry about my score dropping to zero. I was mostly just thinking about that fact that I had heard that the credit companies look at your mix of credit cards and loans etc. So I wondered if not having any sort of loan at all on my account was actually worse.

[dczech09]

Yes, they do look at a mix of your credit cards and loans. Student loans affect your credit score just like other forms of debt.

If you miss payments or are late, it could negatively impact your credit score.

If you are on time and stay on top of your payments, it could positively impact your credit score.

One thingt to understand is that accelerating your payment of student loans can actually HURT your credit score. The reason why is simple. A credit score is a debt score.

When looking at your credit and assessing a score, what is being taken into consideration is your propensity to pay on time. They are also looking at how closely you follow their amortization schedule. The lender wants the most money from you, so they want you on the leash for as long as possible. Paying off loans early causes the lender to miss out on money, so they do not look on that favorably.

My advice is do not focus so much on your credit score. Like I said earlier, if you want a home loan, you can do so with a 0 credit score.