Should Student Loans Pay Off or Invest?

0
15

[ad_1]

Select’s editorial team works independently to analyze financial products and write articles that we believe will be useful to our readers. We may receive a commission when you click on links to our affiliate partners’ products.

When to Prioritize Paying Your Student Loans

When trying to decide what to do first, there are a few things to keep in mind:

  1. Your overall financial condition, including what debts you have (credit card, Auto loan, personal loan, etc.)
  2. Your total student debt and your interest rate
  3. Your monthly student loan payment and how it affects your monthly budget
  4. Any consumer protection measures you may take, including federal student loan waivers, income-based repayment plans, and the ability to federal student loan forgiveness

Then, you’ll want to do a little math to see how much interest you pay for the entire life of your student loan. As an example, let’s take a look at the average student loan balance for a 4-year public college (you can enter your details in FSA Loan Simulator to see what your monthly payments might be).

  • Student loan debt: USD 26,946
  • Interest rate: 3.9%
  • Monthly payment: USD 272
  • Credit term: 10 years

If you don’t combine your loans to get a lower interest rate, it will take you 10 years to pay off your debt, and you will pay a total of $ 32,585 ($ 5,639 of which is interest). If you can’t afford to pay $ 272 a month, you might want to consider an income-based repayment plan that will increase the amount you will pay as interest but make your monthly payments more manageable.

But for this exercise, let’s say you can afford to pay $ 272 every month you already have fully funded emergency fundplus you have cash balances. The question becomes, Should we prioritize repaying loans or investing in the market?

Then you need to think about how much you pay in interest. When Select spoke with Rachel Sanborn Lawrence, Director of Consulting Services and Certified Financial Planner at EllevestShe said that borrowers should feel comfortable accepting targeted debt below 10% per annum, and even better if it is below 5% per annum.

If you are paying more than 10% on your student loans, you should definitely prioritize repayment (and consider refinancing). But in the case of the above example, the borrower should focus on other priorities.

Then take the time to calculate how much you can earn by investing your money versus paying off your student loan debt faster. Here’s an example.

Let’s say you have an extra $ 50 month to pay off loans versus investing in the market. There are many calculators you can play with to find out how much you can earn or save. In this case, we used the Compound Interest Calculator from Investor.gov

  • Initial investment: USD 50
  • Monthly regular investments: USD 50
  • Timeline: 10 years
  • Profit rate: ten% *
  • Total earned in 10 years: USD 9,692

Now let’s see how much interest you will save if you invest that extra $ 50 per month on student loans. For this we used Student Loan Hero prepayment calculator

  • Student loan balance: USD 26,946
  • Interest rate: 3.9%
  • Monthly payment: $ 322 ($ 272 + $ 50)

According to this calculator, you can save $ 1,072 in interest and pay off your loans 22 months faster.

While you can get some savings by investing extra money in student loan debt, you will earn a lot more by investing that extra money in the stock market. In addition, this money will grow over time and will grow faster over time due to compound interestif you left it in the market.

Things to keep in mind

You just need to look at the math to make a decision. However, not all decisions should be made by looking at the numbers in a spreadsheet. Here are a few more things to consider when making student loan decisions:

  • A fully funded emergency fund is top priority: Regardless of which side of the argument you choose, you should make sure you have a fully funded emergency fund with expenditures for 3-6 months before you start investing or invest more than the minimum in your loans. Before deciding between student loans or investing, make sure you have cash in your emergency fund. high yield savings account… Select chose Markus, Goldman Sachs. High return on online savings. as the best with industry-leading interest rates and easily accessible customer service.
  • Refinancing from government loans to private loans: If you have federal student loans and are considering refinancing, you should be wary of compromises. You may be able to get a lower interest rate, but you will sacrifice any chance for federal student loan forgiveness through programs such as the Public Student Loan Forgiveness (PSLF), and social safety nets such as income-based repayment plans or abstinence.
  • Debt can be a burden: Ditching debt to start investing in the future may be the best move on paper, but there is a lot to be said for the pressure of a lot of debt. Capital One found that 73% of Americans consider their finances the number one source of stress
  • If you have chosen the path of investing, invest wisely: Warren Buffett, one of the most successful investors and business leaders of our time, was has been quoted on several occasions stating that the S&P 500 Index Fund is a great way to make money for any investor. This index is one of the 500 largest companies in the United States. While there is always some risk when you invest in the market, this index has risen in value over 40 of the past 50 years, with annual yield 10%… However, it is recommended that you contact a financial advisor to select the right portfolio for your financial goals. Also think of a robo-advisor like Wealthfront or Improvement

Bottom line

Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article are solely owned by the Select editors and have not been reviewed, endorsed or otherwise endorsed by any third party.

[ad_2]

Source link