NEWS
To Invest or Pay Off Student Loans: Which Comes First?
Student loans are a very serious issue in the United States. Many students fail to graduate and get a job in their intended career path. Others have little money left over after they pay their taxes and living expenses. Keep reading to learn how to break free from your debt.
Education is a trillion-dollar industry that traps unsuspecting students into strict payments. 18-year-olds are asked to sign their life away and decide their career path. Many have no idea about interest rates, or how late payments can wreck their credit for years to come.
You can’t declare bankruptcy like regular loans either. This forces you to decide whether it is better to pay off your loans or invest the money into the market.
A typical federally-backed student loan has around a six-percent interest rate. Privately held loans sometimes charge 13% in annual interest. To put this in perspective, a student with $50,000 in debt may have to pay $6,500 a year just to stay above water. Otherwise, they risk destroying their credit score. Debt often traps the borrower into indentured servitude.
3 Reasons To Pay Your Balance Off Early
The Interest Rate Is High
A good rule of thumb is when the interest rate on the debt is over six percent. Investments like stocks and real estate typically grow 6-10% a year. Paying the debt off more quickly is a guaranteed return since you are chopping away at a parasite that is costing you money.
You Have An Adjustable Rate Loan
Many students have adjustable-rate loans. This means the debt’s interest rate fluctuates according to market conditions. Your rate may be low today, but it could go up in the future. It is better to tackle it while the loan is manageable.
You Want To Be Able To Buy Real Estate
Every dollar you pay towards existing debt negatively impacts how much more debt you can afford to put towards a home. Many millennials are locked out of owning property. Rent payments only go towards building equity for the landlord instead. Building equity in real estate is one of the main ways wealth is built by an average person. Missing out can be financially devastating over the long-term.
When To Invest First
The main reason to focus on investing first if you have a loan interest rate. Some students get fixed rates under six percent. They should focus on growing their retirement investments since the stock market can yield a higher return than paying off three to six percent interest loans.
Working in the public sector can be another reason to avoid paying off the debt early. Many public sector jobs guarantee loan forgiveness for working a certain number of years.
How To Pay Loans Off Faster
One way to pay off your balance more quickly is to refinance it. Refinancing is when a lender gives you better terms on a loan because you have good credit and good job history.
This makes your monthly interest payments lower. You should take the old amount you were paying and keep putting it towards the debt. More of the payment will go towards chiseling at the principle instead of just the interest.
Another way to pay your loan off more quickly is to make bi-weekly payments. Paying twice a month means you make an extra payment each year. A person who pays monthly makes 12 payments a year. Paying 26 bi-weekly payments works out to 13 months worth of payments. Every extra payment will buy you freedom in the future.
Making extra payments also helps avoid late payment penalties. Late payments can linger on your credit score for years. They can even force you to pay extra penalties and higher interest rates. It’s better to stay on the side of caution since the party ends once college is over.
Closing Thoughts
The human brain doesn’t reach maturity until the age of 25. Society paints an image of partying and a guaranteed path to high incomes. In reality, many students see their debt as a serious mistake with long-term consequences. You can escape your debt if you take the time to gain financial literacy and stick to your long-term plan.