Foo - Give me Financial Advice- paying off student loans with savings!

My situation:

Early 20's, finished college a little while ago.

No debt other that a grip of student loans. Don't even have a credit or debit card, no checking account either. Currently not working, but very little to no expenses at the moment, and am a very frugal/ascetic person.


I currently have enough in a savings acct to pay off all of the student loans in full, in cash.


Is it worth it to drain all of my life's savings to pay off my student loans in full? I haven't checked my bank statement recently, or my exact loan balance, but I'd probably only have a few hundred dollars left over if I were to pay everything off in one shot.

I realize I cannot earn more on my savings at the moment than the interest rates on the student loans. But I've also heard student loans referred to as "good debt" before.


So foo, in my situation, what would you do? Other general advice or suggestions/anecdotes welcome. Or suggest me some links/books/resources etc.

I would not deplete my savings account to pay off a loan. With the economy the way it is, I'd want enough in savings to provide a cushion for 6 months or so in case I got laid off or had some other catastrophic event that required an outlay of cash.

I would not deplete my savings account to pay off a loan. With the economy the way it is, I'd want enough in savings to provide a cushion for 6 months or so in case I got laid off or had some other catastrophic event that required an outlay of cash.

this!
If you can pay it off and not go below that 6 month cushion, by all means get rid of it. Otherwise, make payments, extra principle payments if you can.

Without an income, why would you deplete all of your savings? That's just silly.

Maintain a minimum of 3 month emergency reserves in savings.

If you have no steady income, that needs to be more.

If you can keep making the student loan payments for the foreseeable future, keep making them and pay off the loans when you have resumed a steady income.

Couple quick clarifications on things-

I am not employed at the moment, but I barter for room/board/utilities, so I have ZERO expenses, save for the student loans that I am talking about, which are easily covered by savings.

I currently have an infinite month emergency fund at the moment- my current lifestyle does not require any money to keep up- I get free room/board/utilities as long as I barter a little time each week for odd jobs, etc.

I've been selling off bikes I never ride and other possessions, making a pretty penny.

while you may not need the money right this second, are you looking for a full-time job to support yourself? that might require a move and $$.

What are the interest rates?

What percentage of your savings is the loan balance? And is the remaining percentage enough to deal w/ a perturbation to your barter arrangement?

Before you pay off your student loans, take a close look at them. Are they all the same type of loan? For instance, are they all Federal Perkins, Federal Direct (subsidized or unsubsidized) or are they Stafford loans? If you have a variety pack, start to consolidate them all into ONE loan before you HAVE to begin payment on them. Go here www.nslds.ed.gov/ (http://www.nslds.ed.gov/) with your Federal PIN to determine what you've got. Here's the difference: Perkins is a loan between you and the school. Your school will have a loan servicer do the actual work on your loan, so it may not seem like you're paying the school. Stafford Subsidized or unsubsidized loans are your run of the mill federal student loan that was originated through an actual lender - Direct loans are the same (Sub or UnSub) except the money comes directly from the Federal Govt, skipping the banks. Both Direct and Stafford loans are serviced by places like AES, USaFunds, SallieMae, etc.

Before you consolidate, get information about the process by more than one place. DO NOT use the Federal Govt as your consolidation venue - the service is terrible! Use a former guarantor, who knows what customer service means.

In any event, if you have a Perkins, pay it off - these are usually smaller balance loans, and the school uses the repaid loans to make loans to new students. If you have Unsubsidized loans, you might want to pay them off, especially since you probably opted to capitalize the interest while you were in school. These loans incur more interest than the subsidized loans do.... there's interest on them while you were attending school, and there's interest on them while you're in your grace period and during any deferment periods.

That leaves your stafford or direct subsidized loans. These have a number of repayment plans - pick one, and accelerate your payments so that you can still have emergency money but easily maintain your payments. This will create an excellent credit history for you. (I'm a student financial aid professional)

You're young. There's no reason to carry unnecessary debt. Pay it off and sign up for a credit card. Having a card with a 0$ balance will build your credit score.

So out of curiousity, are you applying for jobs in your field? Are jobs scarce in your field? I'd be tempted to put the cash into an interest bearing account (money market fund, etc) for an emergency fund until you get a job. I would then reduce the emergency fund to only allow for 3 months living expenses, and use the remainder to pay off the highest interest loan.

One thing I've learned about life is that it is full of the unexpected. That might include the loss of your sweet barter arrangement. Better to be prepared. Keep in mind, if you pay off the loan in it's entirety then realize you need money later, it's next to impossible to get a loan without a job.

Either way, sounds like you're in a pretty good position if you can wipe out your student loans with your current savings. Well done!

You're young. There's no reason to carry unnecessary debt. Pay it off and sign up for a credit card. Having a card with a 0$ balance will build your credit score.

How so? If you don't use it, then there is no activity to track and report. And I've heard that some CC's will try to charge a "dormancy" fee (kinda like some bank accounts).

Student loans definitely are not good debt in the sense that they'll help you get approved for other things. I've been there. If you've got mostly Stafford loans with low rates, those aren't so big a deal to pay off quickly, but if you've got any private loans, I would pay those ASAP, as depending on your interest rates and debt amount you could be accumulating additional hundreds to thousands in debt each year in compounding interest alone.

Many here suggest keeping three or six months' worth of cost-of-living saved at all times. If you're fresh out of college and your parents would be willing to help you out in a difficult spot, I'd say you probably would be safe keeping $500-1000 in savings and using up to the rest to pay off this debt.

Having long account history is important to a credit/FICO score, but I'm pretty sure this does not apply to non-revolving loan accounts, so I would not advise keeping them around to 'build' your credit history. The accounts will stay on your credit report for seven years regardless of whether they are paid off. If paid off, they will simply sit on there as closed and in good standing. If you want to build good credit from here, simply get a credit card and then shred it, keeping the account open with a zero balance on it. The percentage of available credit that you use is one of the major factors in FICO calculation. Another major FICO factor is your income-to-debt ratio, and so getting rid of debt is always better in this regard.

Pay off the loan and bike tour around the world.

This rational thread is overdue for a (im)proper Foo response- strippers and booze.

Pay off the loan and bike tour around the world.
Fill your panniers with booze and bring a couple strippers.

My situation:

Early 20's, finished college a little while ago.

No debt other that a grip of student loans. Don't even have a credit or debit card, no checking account either. Currently not working, but very little to no expenses at the moment, and am a very frugal/ascetic person.


I currently have enough in a savings acct to pay off all of the student loans in full, in cash.


Is it worth it to drain all of my life's savings to pay off my student loans in full? I haven't checked my bank statement recently, or my exact loan balance, but I'd probably only have a few hundred dollars left over if I were to pay everything off in one shot.

I realize I cannot earn more on my savings at the moment than the interest rates on the student loans. But I've also heard student loans referred to as "good debt" before.


So foo, in my situation, what would you do? Other general advice or suggestions/anecdotes welcome. Or suggest me some links/books/resources etc.

ABSOPOSILUTELY NOT.

Once the money is gone, you do not seem to be in a position to replace it.

Student load debt never goes away, and it never gets discarged in bankrupcy. You will have this till you pay it off, but you probably have it on a payment plan now. Keep paying the minimum, and while you are at it, call them up an ask if they will consider reducing your interest rate as you are unemployed. Give a sob story about how you may not be able to keep paying with no regular job unless they do something to help you out. Never hurts you know.

My advice would be wholly different and in-line with the others above IF.. if.. if.. if... you were working. Biut so long as you are not, keep the cash. Period.

you can NEVER get a federals student loan interest rate cut - the rate is set by the US Congress. Sometimes they will reduce it a smidge if you set up automatic debits from your checking account, but that basically just offsets postage! You CAN get an unemployment deferment. You CAN get your payments reduced. You CAN get loan amounts cancelled for a multitude of reasons - mostly having to do with the type of employment you get - there's a whole bunch of literature that comes with a student loan that students never seem to read....

If the loans are those "alternative" student loans, pay them off. All those loans are is unsecured debt. There are no interest guarantees on them. If you have alternative student loans through the same place as your guaranteed (Stafford or Direct) student loans, MAKE SURE YOU LABEL YOUR LOAN PAYMENTS. Unlabeled payments will go to the alternative loans, which will then cause a non-payment default on your guaranteed student loans.

NOTE to current students: get jobs, not alternative loans.

you can NEVER get a federals student loan interest rate cut ... Sometimes they will reduce it a smidge if you set up automatic debits.

Interest rates on federal direct loans will drop 0.25% if you set up automatic payments.

Keep paying the minimum, and while you are at it, call them up an ask if they will consider reducing your interest rate as you are unemployed.

I disagree with the advice to pay just the minimum payments. Doing this will simply ensure you rack up as much interest as possible, and ultimately will end up paying much more.

If you consolidate your student loans, make sure no one tries to have you consolidate federal loans with a private consolidation loan, as you will end up paying much more in interest!

the only problem with that interest rate reduction is - for those struggling graduates who might not have a job - the overdraft fees for 1 bounced check will eat up any savings. if these is no assured, constant income stream, you're better off just making "one-time" payments monthly on line, and to keep the federal government OUT of your checking account!!

There is an income contingent repayment plan which is based upon the borrower's income - monthly payments start out really really low, and increase as the borrower's income increases.

There is also an income based repayment plan available for people who work in some areas of the public sector: take the adjusted gross income, subtract 150% of the poverty guideline for the family size, take 10% of what's left, and divide by 12 to get the monthly payment. It's adjusted each year, and the balance is cancelled after 10 years. (minimum monthly payment = $10.00) This is designed for law enforcement, public defenders, public health personnel, some teachers, some military.

Is it worth it to drain all of my life's savings to pay off my student loans in full?

The things to keep in mind are:

1) You should never deplete your savings except in emergencies.
2) To establish and maintain an excellent credit rating, you have to have some (good) debt.
3) Student loans are usually one of the best kinds of debt you can have because the interest rates are usually low, the loan term (length) is usually long, the payments are usually small, there's no collateral, and you can sometimes defer payments unlike most other loans (e.g. if you go into the military, go to grad school, go bankrupt, etc.).

It's a good feeling to have NO debt, but it's a terrible idea to get there by depleting all your savings. So unless you got some ridiculous student loan interest rate like double digits you should probably just make the minimum payments. IF there's no over/pre-payment penalty, make more than the minimum if you can, and just the minimum when you can't.

Wow. I'm jealous. Early 20s myself, been out of school for 2 years (working part time 1 year, full time another year). I would LOVE to pay off my student loans. If you can keep 6 months of emergency fund aside and put the rest towards paying off student loans, DO IT. They are the fricken devil.

My schooling was only 38 grand, yet I already feel like I'm sucked into a life-long debt payback. It sucks being a college full time working grad still unable to pay off simple things and save up enough money to sustain a single lifestyle in a small broken down house. I don't really have that many expensive hobbies besides the occasional replacement bike part, but car insurance, gas, and student loan bills stack up REAL quick... Gahhh...

Here the deciding factor: net worth and its direction. Take all your assets and subtract your liabilities and see what the number is. Then track its progress for a couple of months and make a future projection.

Given the simple financial model the OP is living in, it's all based upon interest rates. IF the loan interest rate is HIGHER than the savings-account rate, then your net worth is declining steadily due to the higher interest incurred on the loan. In this case, it's best to lower the principal owed on the loan as much as possible by paying some or all of it off.

IF the loan interest rate is LOWER than what you're earning in savings, then pay it off with minimum payments since you can earn more with your money by parking it in savings. It comes down to the actual numbers that the OP hasn't posted.


I had $26k in student-loans from various sources when I got out of school. Luckily, I was offered a full-time position at the company where I worked part-time throug school with a significant raise. I use some of my income to pay off the higher-interest loans, but put the majority of the extra earnings into my savings (I still lived like a student on Top Ramen, so I was putting thousands away each month.) I chose to hold off on the lower-interest loans because I knew I could make more with my savings & investments than accrued interest on the loans. After a couple years of 140% and 300% returns, I paid off the rest of my loans outright in one lump sum.


So the answer as usual is "it depends". Based upon the actual amounts and interest-rates owed versus savings-rate & growth, and future earnings, you may or may not want to use your savings to pay off the loans. I always prefer to keep at least 6-months of living expenses in savings just as a cushion.

I disagree with the advice to pay just the minimum payments. Doing this will simply ensure you rack up as much interest as possible, and ultimately will end up paying much more.

If you have no job and run out of cash, what do you eat? how do you pay the rent? Gas for a car if you need it for a job? or transit fare?

NEVER part with your dollars when you have no means of replacing them.

There is a concept called "present future-dollars discounted." Given steady onslaught of inflation (historical average 5-7%, but much more than that in the past 10-years), your money's purchasing power is always declining. A lump-sum of $10k to day may buy X-numbers of pizza dinners and beer. But in 10-years, it may only buy you 1/2X pizza dinners & beer (if you're lucky).

So if you can carry a loan out to 10-years at a low rate (below inflation), you'd be paying off that loan with depreciated future money and will be ahead. But again, "it depends" upon the exact interest-rate of the loans the OP has. The banks know this game all to well and it's always rigged in their favour. They always price loans with interest-rates above inflation so there's no way you can end up ahead of them.

The financial crisis is the result of too much savings chasing too few assets pumping up prices into crazy bubbles that expand and pop like whack-a-moles faster than the cash can get to the next one.

Spend it all now, don't contribute to the problem.

The financial crisis is the result of too much savings chasing too few assets pumping up prices into crazy bubbles that expand and pop like whack-a-moles faster than the cash can get to the next one.

Spend it all now, don't contribute to the problem.
So wait, its a bad idea to save money now?

I would not deplete my savings account to pay off a loan. With the economy the way it is, I'd want enough in savings to provide a cushion for 6 months or so in case I got laid off or had some other catastrophic event that required an outlay of cash.

Pretty much what I was thinking.
Then again, how much are we talking about.
If it is only a couple thousand, I might be inclined to pay it off so it just doesn't bother me any more.