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After years of making payments on their student loan debt, most borrowers who pay off their loans typically end this journey with a lump sum payment, according to a recent study by the Bureau of Consumer Financial Protection’s Office of Research.
In this report, the research team reviewed approximately 270,000 student loan borrowers’ use of credit as they approached and completed their final student loan payments as well as their post-student loan payoff spending behaviors.
So what happened when borrowers paid off their loans early? According to the study, for borrowers making their coveted final payment, bigger is better. The team found single, large final payments that were a median of 55 times larger than the scheduled payment. This suggested that payoffs were at least 55 months ahead of schedule.
In addition, 94 percent of final payments exceeded scheduled payments but only 6 percent of loans were paid off by borrowers with the final few payments equal to the scheduled payments. Furthermore, for loans within five years of their scheduled payoff date, median final payments are more than seven times larger than the scheduled payments made immediately prior.
Next Up, Home Purchases
Once borrowers paid off their large debt early, what did they spend their money on next? The study found 31 percent were more likely to take out their first mortgage loan in the year following the payoff vs. during the preceding year. In the same month as the payoff, borrowers reduced their credit card balances and made large payments on other student loans.
While the findings disclosed a link between the timing of student loan payoffs and home purchases, there’s more: simultaneous credit card and other student loan balances cuts suggest that more wealth or income could affect when borrowers pay off their student loans, decrease their credit card balances, and buy homes.
For smaller borrower groups who paid off their loans according to scheduled payments, buying a house isn’t next. Instead, they’ll pay down other debt in ensuing months with 24 percent paying off other student loans and 16 percent paying off credit card balances. But they did not take on new debt.
Making Final Payments
The study also examined how borrowers made their final payments. It showed that as most borrowers neared their last student loan payment, they preferred to (and if they could do so) pay off the loans in full with a single large payment.
As for the payment’s specific timing, it coincided with a larger reduction in existing debts, followed by a rise in homebuying.
But for the borrowers who were either unable to or chose not pay off their loans early, the reduction of other debts that follows their final payment suggests that their required monthly student loan payments constrained their ability to pay down other debts.
Author: Debbie Baratz
Debbie Baratz has written about topics including personal finance, financial markets, and banking. And as a media relations professional, she spent 10+ years working at not-for-profit, private, and publicly-traded financial institutions. When Debbie isn’t working, she can be found working out, reading, or traveling.