In another article, I wrote about my personal experience with student loans and the mistake I made of deferring the interest to reduce payments in the early years.
Most students have no idea what they are getting themselves into when they agree to the terms of a loan. Paying something off years in the future may as well seem like leaving the debt for a descendant in the future.
That is how disconnected or detached the future seems to our youth. Schools and financial institutions, tell them only what they need to legally so they can enforce repayment. Teens are even shown films at some universities demonstrating the consequences of not paying off their student loans.
The problem is no one tells them the best way to pay them off, or what to make sure they avoid when doing so, for their own best interests.
I’m going to share with you now how to save thousands of dollars.
So here is the deal, if at all possible, try not to need a loan. Get a scholarship, grants, use savings, etc. But if you do need to take out a loan, make it the smallest you can and get the best interest rate possible. Less than 5% is ideal.
Make sure you finish school, so you can get a good job and be financially able to repay the loan to the original terms or even faster. Let’s say you borrow $5,000 per year. Over four years of study the principal amount equals $20,000 plus interest.
Let us assume the terms of the loan state the period of repayment will be ten years beginning after graduation, with no pre-pay off penalties. You graduate after four years and land a decent job at entry level earnings.
If times seem tough, you must make sure you make the minimum monthly payment no matter what. Do not defer interest or payments and do not miss any payments accidentally (this affects your credit).
Also, do not refinance for a “better” rate. This will only extend your payment period and consequently result in greater interest accrued over time and more to pay back.
If you stick to these rules you will pay off the loan after ten years, and in doing so, not only paid back the original sum of $20K, but also the accrued interest which would amount to thousands more.
One thing you can do is, when you file your tax return ensure that you get the 1099 form and report the annual interest annual you paid, because you can deduct it. But the most important thing you can do is what I will tell you now.
Imagine if it was possible to get a refund of all that 5% interest you will pay, thousands of dollars. Well, it is possible, and it is easy. You just need a way to earn more interest (somewhere else) than you are paying to them.
All you have to do is be able to not only make your minimum monthly payment, but also have about $400 monthly or $5,000 per year to invest in the stock market. You don’t have to know about stocks (it wouldn’t hurt , though), you could invest in ETFs or contribute to an IRA or Roth IRA, (see one of my articles to teach you more on this), and easily earn an average of 10-13% in interest annually.
Not only will you more than make up for the loss in interest for the loan, you’ll profit as well. In fact, if you keep your money there for 25 years or more, you may even retire a millionaire.
*This information is based on S P500; averages over 5 years, even including the crash in Oct. 2008. In 2010, the S P500; averaged 13% for the year.
Those invested in this fund did not need any knowledge of the market, since it is a collection (average overall performance) of the top 500 large cap companies.
Stock advice is based on past performance, but past performance is not indicative of future results. The author is not held in anyway responsible for anyone’s personal investment choices.