The Student Loan Dilemma
I’ve had a lot of questions lately on College Loans and in particular, whether you should pay them off early if you have extra cash. Although I wish I could give you an answer that would cover everyone, the answer lies in the details of each and every one of us.
However, I am able to give you a guide on where you should begin to get the information to ultimately make the best decision for you.
First….Let me share with you an all too common story of students obtaining the loans. The terminology here matters, because you will see the terms “Grants”, “Scholarships”, “Work Study”, and “Loans”. I’ve seen many students take out grants or receive scholarships that had some type of criteria that needs to be achieved, and the student did not meet and their grant became a loan.
I’m not anti-student loan, in fact there are some great programs, that are backed by the government, and generally have a low interest rate. So, if you have financial needs, these types of loans are better than building credit card debt, but please make sure you understand what you have. Spending money to educate yourself, I view as an investment rather than a cost. There’s lots of studies out there that will show you how much more the average grad makes compared to someone who did not attend college. Also, on average, those with a degree have a much lower unemployment rate. Source: SmartAsset If you’re like some of the former students I’ve spoken with, and are kicking yourself for letting student debt stack up…relax, your career has only just begun.
Now to the decision to pay it off. Generally speaking, this loan should be one of the cheaper rates you will have access to. If that is in fact the case, before making the decision to accelerate payments or not, consider your other debts. Car, credit card, etc., that may have a substantially higher rate of interest.
In addition, do not let your college loans delay your decision to start your retirement savings. Today more than ever, it’s extremely important for new college grads to have a retirement plan. Back when your parents or grandparents started in the workforce, they may have been offered nice benefits such as a pension when they retire, as long as they stayed with the company for so many years. Place on top of that Social Security, and that becomes a pretty comfortable retirement. Today, we are probably not going to be as fortunate. Most of us will have several different careers and it’s unlikely that you’ll receive a pension. Right now, without changes to the Social Security legislation, the trust fund is predicted to be bankrupt in a little over 10 years. What that tells me is that we will be on our own for saving for retirement.
When you start in the workforce, and if your income is relatively low, you may want to consider a Roth IRA or 401k contribution. A Roth contribution, unlike a regular IRA or 401k contribution is taxed first and then grows tax free. Because you’re so young, your money will have the chance to grow for all those years and come out tax free after age 59.5. Taking advantage of that can be very advantageous in later years.
So let’s recap….If you’ve been able to satisfy other debts and you are starting to fund your retirement plan and still have left over cash, then sure, go ahead and knock that loan over. Just one last note… Never stop investing in yourself.
p>Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.
