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Who would have a better credit score: Someone who borrowed 90k in student loans, or someone who borrowed 99k in student loans and paid back the 9k over the three years of law school?

I am asking because I have a small sum of capital saved up (<10k) and I am getting advice to pay down the debt I am taking. The reason I am hesitant is that I am using it as a rainy day fund. Would it be worth liquidating that cushion to pay part of my loan, or do credit agencies don't care? (The interest on the rainy day fund is low enough so as not to be a crucial part of my decision)

No difference. Both will be in good standing.

If you have no other savings, 10k seems like a decent amount to put in the bank for a rainy day fund, assuming you're single and live in a low cost city (otherwise might be higher). You don't want to ever be in a situation where you don't have enough cash on hand.

If you end up with money over that, it couldn't hurt to pay down loans, not just because of the credit benefits but also because you get a guaranteed 7.9% annual ROI. I'd take that any day.

EDIT: If you do this, don't use it to pay down existing loans, use it to pay tuition and forego taking future loans, that way you avoid that nasty 4% origination fee. This will have zero impact on your credit score but will save you a lot of money long term.

The Duck wrote:No difference. Both will be in good standing.

TCR

It's one of the major flaws of the credit score system

badaboom61 wrote:If you have no other savings, 10k seems like a decent amount to put in the bank for a rainy day fund, assuming you're single and live in a low cost city (otherwise might be higher). You don't want to ever be in a situation where you don't have enough cash on hand.

If you end up with money over that, it couldn't hurt to pay down loans, not just because of the credit benefits but also because you get a guaranteed 7.9% annual ROI. I'd take that any day.

EDIT: If you do this, don't use it to pay down existing loans, use it to pay tuition and forego taking future loans, that way you avoid that nasty 4% origination fee. This will have zero impact on your credit score but will save you a lot of money long term.

I am actually only borrowing 20.5k per year (the 90k was a hypo) so I don't hit the next loan up. That means the origination fee is only 1% and the ROI is 6.8%.

Thanks for the advice!

I don't think ROI means what you guys think it means

dingbat wrote:I don't think ROI means what you guys think it means

ROI = Return on investment. If you have a loan at 6.8% interest, then the ROI of paying down the loan is 6.8%.

The Duck wrote:No difference. Both will be in good standing.

Really? It was my understanding that making periodic payments on debt (student or otherwise) is good for your credit report.

jwahba wrote:

dingbat wrote:I don't think ROI means what you guys think it means

ROI = Return on investment. If you have a loan at 6.8% interest, then the ROI of paying down the loan is 6.8%.

No, just no.
6.8% is your cost of capital.
If you were to invest the funds, then your gains would be reduced by your cost of capital to determine your ROI (if your gains are 10%, your ROI would be 3.2%; if your gains were 5%, your ROI would be -1.8%)
If you pay down your loans, your cost of capital becomes 0. Until you invest funds, you have no ROI.

dingbat wrote:

jwahba wrote:

dingbat wrote:I don't think ROI means what you guys think it means

ROI = Return on investment. If you have a loan at 6.8% interest, then the ROI of paying down the loan is 6.8%.

No, just no.
6.8% is your cost of capital.
If you were to invest the funds, then your gains would be reduced by your cost of capital to determine your ROI (if your gains are 10%, your ROI would be 3.2%; if your gains were 5%, your ROI would be -1.8%)
If you pay down your loans, your cost of capital becomes 0. Until you invest funds, you have no ROI.

Right, it is not an "actual" ROI, but it works as a psuedo-ROI. If you have cash to invest, and a loan at 6.8%, the loan operates the same exact way as an "investment opportunity" with a guaranteed ROI of 6.8%. Yes, it's sloppy, but in practice it is the same.

jwahba wrote:

dingbat wrote:

jwahba wrote:

dingbat wrote:I don't think ROI means what you guys think it means

ROI = Return on investment. If you have a loan at 6.8% interest, then the ROI of paying down the loan is 6.8%.

No, just no.
6.8% is your cost of capital.
If you were to invest the funds, then your gains would be reduced by your cost of capital to determine your ROI (if your gains are 10%, your ROI would be 3.2%; if your gains were 5%, your ROI would be -1.8%)
If you pay down your loans, your cost of capital becomes 0. Until you invest funds, you have no ROI.

Right, it is not an "actual" ROI, but it works as a psuedo-ROI. If you have cash to invest, and a loan at 6.8%, the loan operates the same exact way as an "investment opportunity" with a guaranteed ROI of 6.8%. Yes, it's sloppy, but in practice it is the same.

in practice it's the same, but it's a bad way of looking at things.
If you have cash to invest and a loan outstanding...
betting on margin is a really bad idea and for most people it ends in bankruptcy