Borrow Money To Pay Off Student Loans

Borrow Money To Pay Off Student Loans – Today, holding a college degree is the table stake to qualify for a decent job. As more people are attending four-year colleges and the degree is the minimum qualification for many positions, we are also seeing an increase in students continuing their education to earn a bachelor’s degree.

But with more schools, more student loans. Once you’ve finished all your schooling and started earning a full-time income, you’ll need to decide whether to pay off your student loans quickly or contribute your available cash flow to investments for long-term growth. .

Borrow Money To Pay Off Student Loans

The right answer for you depends on a number of factors, but the best solution may be a combination of both. While being debt-free is attractive to many people, don’t underestimate the benefits of investing early in life.

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To simplify, let’s imagine two college graduates have access to a tax-deferred investment account that earns 8% annually. The first investor saves $250 per month for ten years ($30,000 total), then does not invest again for the next 30 years. At the end of the 40-year period, the portfolio will be worth $509,605.

On the other hand, the second investor did not invest in the first ten years of the same 40 years. Instead, he contributes $250 per month to investments for the next 30 years for a total contribution of $90,000.

Who do you think has more money in their portfolio at the end of 40 years? You can say the second investor, who, despite waiting to start, made more contributions than the first. But the second investor will only have $375,074 in his portfolio.

Despite saving more money in the long run, investors who started later earned $134,531 less. Compounding time and energy is the most powerful combination for creating wealth.

Years Of Student Loan Repayment [oc]

Of course, there is another side to consider. Yes, the benefits of compounding investments are many – especially if you have decades before retirement and use tax-deferred accounts – but student loans with higher interest rates than your expected investment return may be worth more than the extra savings.

Optimizing the amount you use to invest instead of repaying depends on the interest rate, terms and repayment characteristics. The best option for you also depends on the storage vehicle you have available and the return you want on your investment.

However, results depend on personality as in mathematics – after all, we do not use spreadsheets.

Some people like the idea of ​​being debt free. Others will choose to maximize savings. You might like the idea of ​​doing both.

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With that said, it is a personal choice to pay off student loans rather than investing.

It’s hard to find a 100% guaranteed investment return, but matching your employer in your retirement plan isn’t like that. If the employer offers to match part of the 401 (k) (or 403 (b) or 457 plan) contributions, invest at least as much. Otherwise, you are leaving free money on the table.

For example, if your employer has a 3% match and your salary is $100,000 a year, contributing at least $3,000 of your own money qualifies for a matching contribution. Once you have invested at least enough in your employer plan to get a match, move on to the next account.

The sooner you start investing, the more time you have to take advantage of the power of compounding and the more money you can accumulate. Even better, since you’re investing in a tax-deferred account, you’ll also get additional tax benefits.

Check Out These Ways To Pay Off Your Student Loans Faster

You can’t ignore the importance of having cash for unexpected expenses, whether you have debt or not. In fact, put some extra savings into an emergency fund ahead of extra debt payments or extra investments.

Depending on your situation, an emergency fund should contain three to 12 months of expenses. This may sound like a lot of money, but this cash account doesn’t have to be created overnight. If your emergency fund is starting from scratch, allocate at least 10% of your extra savings each month to your emergency fund. If you have a high level of job security and income predictability, you may be able to make this account slower.

Online banks tend to offer the highest interest rates today. Additionally, keeping your emergency savings separate from your main checking account at an online bank can help you avoid the temptation to access those funds for non-emergencies.

If your interest rate is more than 8%, it may make sense to allocate the rest of your savings to pay additional principal on this expensive loan. If your interest rate is between 6% and 8%, it may be enough to set aside half of your extra savings each month before investing more.

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At this point, you want to stop prepaying your federal student loans. Private student loans typically charge higher interest rates than federal student loans. It also offers the low-payment features typically found with federal student loans.

These benefits include deferred payments and benefits while in school or upon returning to school, loan forgiveness for specific projects or public services, income-based repayment plans, balance forgiveness upon death and conditional loan forbearance.

Private student loans sometimes have some of these features, but they rarely have all of them. The flexibility of payments and the lack of features make personal loans a good candidate for consolidation and refinancing. (Federal student loans often lose payment features when they are consolidated.)

Employer-sponsored retirement plans are often the cheapest place to access a variety of investments for retirement. Employer-sponsored retirement plans such as 401 (k) plans offer tax-deferred compounding, so it’s worth taking advantage of these benefits to reduce your tax burden.

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Your plan may allow you to contribute to a Roth or traditional account. If you expect to be in a higher tax bracket in retirement than you are now, a Roth 401(k) is the best option. If you expect to be in a lower tax bracket in retirement than you are now, a traditional 401(k) may be better.

If you don’t like predicting whether your taxes will be higher or lower in retirement, consider contributing to traditional and Roth options. This strategy is known as tax diversification.

Nonprofit employees who have access to a 403(b) should aim to max out the vehicle at this stage. The same goes for government employees who have access to 457 plans. Small employers sometimes offer IRA or Simplified Employee Pension (SEP) options, both of which fall under the category of retirement savings preferences.

After maxing out your contributions to an employer-sponsored retirement account, you can pay off your federal student loans by paying down at least 6%.

How To Pay Off Your Student Loans Early And Build Your Finances

If you have federal student loans with interest rates below 6%, make only the minimum payments until the loan is paid off and set aside extra cash flow for future investments, building an emergency fund, or even other goals. buy a house Low interest rates Federal student loans are not very expensive, especially when compared to the potential returns in the stock market.

There is one exception to this rule: If you work in a profession where your loan is forgiven after a certain number of years, make sure you follow the rules of the program to make sure your balance is forgiven.

The above command to prioritize savings largely ignores the common emotions that people feel in debt, but then again, people don’t live on spreadsheets. The emotional appeal of being debt-free is hard for many people to ignore.

Most people with relatively small student loan debt should prioritize paying off this debt just to get rid of the obligation emotionally.

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Others can be more aggressive in prepaying loans if they suddenly come up with financial resources and want one thing less on the plate.

Some feel more in control of their finances by being debt free. This is especially true when a large loan restricts finances. Paying early gives you more control over your money and options for the future.

While there is no perfect answer, it is important to remember that the choice between paying off student loans or investing for the future is not always an exclusive decision. A combination of the two will be the best solution both mathematically and emotionally.

Share in the comments: What is your main focus in your finances right now? Are you investing, paying off debt or something else?

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