Skip to comments.Paying Off Student Debt: Can You Find a Financial Balance?
Posted on 01/11/2012 11:34:11 AM PST by Kaslin
Dear Carrie: I am relatively new to investing. I have set money aside and plan to take an aggressive approach to paying off my student loans. Can you offer an ideal action plan for both investing and lowering student debt? --A Reader
Dear Reader: With money set aside and wanting to put a plan in action, it sounds like you're already headed in the right direction. Now it's time to get down to specifics so that, ideally, you can accomplish both your investing and debt lowering goals -- and then some.
Student debt can be daunting, and you're right to make it an important economic focus. But student loans are generally low interest and don't appear as a black mark on your credit rating as long as you never miss a payment. So rather than making paying off your loans your primary goal, I'd make it part of a bigger picture in which you take care of current needs as well as plan for the future. Here's what I suggest.
SET A MONTHLY SAVINGS GOAL
It's great that you already have money set aside. But don't stop there. The key to staying on top of your finances is to make saving as much a part of your monthly budget as paying your bills. Take a look at your current expenses and make saving a line item. Don't think of it as an extra, think of it as a necessary payment to yourself. And be as generous as you can -- because how much you regularly save is fundamental to your financial success.
COVER YOURSELF IN CASE OF EMERGENCY
The first place for your savings is in an emergency fund. You should try to keep at least three to six months living expenses in an easily accessible account like a savings or money market account. With this money tucked away, you'll be better able to cover your bills (and your student loan payments!) in case of a job loss or unexpected illness.
PUT YOUR EMPLOYER TO WORK FOR YOU
If you work for a company that has a retirement plan such as a 401(k), contribute enough to get any company match. Since the money is pre-tax and comes directly out of your paycheck, it's an effortless way to begin to save for retirement -- and the company match is extra money without having to lift a finger.
CONSIDER CONSOLIDATING YOUR STUDENT LOANS
President Obama's new "Pay As You Earn" plan, introduced in October 2011, included making it easier for recent graduates to consolidate their federal loans and achieve lower interest rates. If you have federal loans, check to see if this might benefit you. You can also look into consolidating private loans, but understand that you can't combine federal and private loans into one. Whatever your situation, it's worth considering -- both to save money and to also make it easier to manage your payments.
In financial terms, student loans are often considered "good debt," sort of like a mortgage (and unlike credit cards!). So while it's great to be rid of student debt, you don't need to rush to pay it off. Just make regular, on-time payments while you get the rest of your financial house in order. However, timing is crucial because a late payment will be a ding on your credit rating.
Of course, you can always accelerate your payments if you find yourself with extra money in your pocket. If you do, pay down your higher interest, adjustable rate loans first. You can think of it as a risk-free rate of return. For example, if you're paying 7 percent interest on your student loan, paying it off is the same as earning 7 percent on an alternative use of the money. Even in the best of times, a risk-free 7 percent rate of return is hard to beat. These days, it's a no-brainer.
TAKE A LONG-TERM APPROACH TO INVESTING
Now with all of the above in place, you can think about investing. In volatile times like these, your age is your best advantage. Investment choices depend largely on your time frame and feelings about risk. Generally speaking, you can take more risk with money you won't need for many years, so with a long time horizon, stocks still offer the best opportunity for growth. You might begin with something like a broad-based stock mutual fund or ETF. But before you start, take some time to learn the basics of asset allocation and diversification. These are still the building blocks of smart investing, though they cannot eliminate the risk of investment losses.
Your question was a great first step in tackling your financial challenges. Now you have an even greater opportunity to take action. The steps I've outlined may not seem dramatic in themselves but, believe me, when you put them all together they can add up to significant results. Best of luck.
...uh...get a job?
These are all good concepts. However, they are all dependent on how much someone makes and their current situation.
If they make $30K a year or $80K or $160K, different plans would be in order. The emergency savings comes first while they are paying normal payments. Then savings can start but it depends on factors such as if they need to save for a house or a wedding, etc.
Someone who makes the $160K could build up the emergency fund and then start paying off the student loan with everything they can. Then start saving for a house.
The $30K earner can only build up an emergency fund and the make regular payments on the loan.
All financial plans should be based on the individual’s financial situation and goals.
Use “OBAMA MONEY”....if you’re of the correct Ethnic persuasion......don’t EVER pay it back out of your own money; he’ll appropriate it from someone else, because “they can afford it”.
Just ask them for a bailout, like the banks, fatcorps and Wall Street are getting.
How about a bailout?
Uh no, Carrie.
The nasty thing about low-cost loans is that they don’t always stay low-cost. If market conditions change, where interest rises, what was low-cost may end up costing a bundle.
Like all loans, including mortgages if you can, if you have them dump them ASAP.
This is about student loans which are usually lower
Best thing to do about student loans is to not take them out. If you can’t afford to work your way through college then you are attending the wrong college. IMHO most major universitys degree’s are not worth the price they demand for them.
I have to agree. if people would be less ‘posh’ about their job expectations, then I am sure that they would pay off their debt in no time. I heard that bartenders and cocktail waitresses make mounds of money in the right places and that other less ‘posh’ places are paying well. All it takes is a little effort and willingness to make something rather than sit around, and then you end up with nothing. If half these idiots with their law degrees were to go out and make their own way, I am more htan sure there would be more than enough legal work for them.
Too many are not entrepreneurial and too many are not willing to make effort to build up their own business and end up more in control of their own life than they would have dreamed.
Ultimately, a loan is a loan. No guarentee that low interest loans of any kind will stay low interest.
In stable economic situations, it may pay to be clever. But in less stable times, where interest rates can rise unexpectedly, you can too clever.
Make the colleges and schools that enrolled these students and should have given them the skills, values and motivation to be productive citizens able to pay off the loans. Put a little accountability on the schools. These schools are sitting on hundreds of billions of dollars and they should be made responsible.
I’m nearing my retirement date after 32 years with my local water agency. I started out about a year after I left the US Navy in 1978.
I’m done now, never took out any loans!
I’ll be 55 in 55 days, and plan to sleep in every day until 7:00 am.
I used ALL my money to raise my small family.