When College Loans Attack
Going to college is a smart move if you can swing it financially. For many of us, that swinging is done through student loans. We thank are lucky stars they exist when we use them to pay for school, but curse them when it comes time to pay them back.
After you graduate, you will start getting invoices for monthly loan payments. The question will quickly become how to pay them off as quickly as possible. Should you throw whatever extra money you have at them each month or invest it and then pay them off all at once?
At this point in the article, you are probably smirking. Extra money. What extra money? The truth is you have it, but just do not recognize it. If you could set aside $5 a day, you would have $150 at the end of the month and $1,800 at the end of the year.
Most of us have government loans. Thank goodness. They come with relatively low interest rates. This means you can make a big dent by throwing extra money at them each month. Then again, investing the money might be the better solution.
Basically, we need to compare the gain of the investment versus the cost of not paying the loans down. Pengrowth Energy pays a fifteen percent dividend each year. Assuming your loan has a seven percent interest rate, investing your money makes more sense.
Two other factors need to be considered. Will you have the discipline to leave the investment fund alone? If so, is it still wise to go with the investment strategy if taxes are figured in? Capital gains are generally taxed at a rate of 15 percent, so do the math.
For many people with student loans, the answer to this question really comes down to their personal attitude towards debt. Some prefer to save and assume they will be able to produce enough of a gain that they will come out ahead even after taxes. For others, knocking down the balance is the key.
If you prefer to work on the loan balances directly, how will you approach it? There is one strategy that works well. The first step in applying it is to break down your loans from one giant debt into smaller pieces you can financially and emotionally handle.
Your first step is to pick the smallest loan. After you make all your monthly payments, apply whatever extra cash you have to that small loan. Be disciplined. Since the loan is probably relatively small, you should be able to pay it off quickly, often in less than a year.
Once the loan is paid off, you will feel a sense of accomplishment. Yes, even though it is a relative small amount of your total debt. The point is to get positive feedback, which helps with your discipline. Now do the same with the next smallest loan.
Paying off your student loans is one of those magical points in your life. It does not matter so much which strategy you use to do it so much as it matters that you just get started doing it. Do not procrastinate. Get moving today.
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