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If you go to college, you may have student loans. Student loans can be a huge burden, and keeping your monthly payments can make it difficult to achieve other financial goals. In fact, a study by MIT AgeLab found that 84% of American adults’ student loans have a negative impact on their retirement savings.
If you are dealing with student debt, it can be difficult to decide whether to repay your loans or prioritize your future investments. We are broken when you have to repay student loans or invest your money to help them make the right choice for you.
Do I have to repay or invest student loans? 5 Reasons to Consider
When it comes to personal finances, experts often recommend that you focus on two things: paying off debt and saving for retirement. However, it can be difficult to save on pensions if you are in debt for student loans. To help you decide where to put your money, consider the following five factors:
1. Student loan interest rates
The interest rate on your loan should help you make your decision. Your interest rate affects your monthly payments and your total payment. If you have high interest rates, interest can accumulate quickly, adding to your loan balance. In this case, it may be wise to pay off the debt to reduce your interest rate, and it will release more cash along the way.
2. Type of loan
There are two main types of student loans – federal and private. Federal student loans are government-sponsored and tend to have lower interest rates than private loans. They also have more benefits and options for borrowers, including alternative payment plans and loan forgiveness programs.
Private student loans are a dangerous type of debt. They offer less protection and repayment options than federal loans and often have higher interest rates.
3. Employer contributions
If you are weighing the pros and cons of investing, review your employment benefits before paying off your debt. If your employer offers a retirement plan such as 401 (k) to your employees and makes related contributions, that is a huge benefit that you are not currently using.
4. Financial goals
Think about your goals. If you want to become a homeowner or start a business, you may know that your loans are far behind. Conversely, if you want to retire early, you may want to focus on investing.
What you prioritize can affect your age. If you are actually out of college and in your 20s, you have plenty of time to save. But if you are in your 40s or 50s, you don’t have much time to waste if you don’t have enough money in your pension fund right now.
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When to prioritize repayment of student loans
The common question people ask is, “Do I have to repay my student loan or invest in it?” Is. While there is no one-size-fits-all solution, here are three possible ways to pay off your debt before investing.
1. Your loans have high interest rates
Student loans can have very high interest rates. According to the College Access and Success Institute, private student loans rose 14.24% in 2019. Although federal loans have lower interest rates than private loans, their rates may still be higher. For example, direct PLUS loans to parents or graduate students were 6.3% interest rates for the school year beginning July 1, 2021.
If you have high interest rates, your interest rate may be higher than your earnings in the stock market, so it may be reasonable to deal with your loans first.
Use the Forbes Adviser Student Loan Calculator to see how your interest rates affect your fees and total payments.
2. Your loans are volatile
Federal student loans always have fixed interest rates, so your repayment period stays the same. This is not always the case for individual student loans. Some private loans have variable interest rates that may change over time.
Variable rates may start low, but may increase significantly. If you have a flexible loan, you can avoid the fluctuations and save money as soon as possible.
3. Your loans are stressful
Personal finance is not always about numbers, and can be very emotional. If your student loans are causing you great stress or are holding you back from lifestyle goals such as home ownership, it may be helpful to repay your loans first for peace of mind.
When to prioritize investment
If you are unsure about investing or repaying student loans, here are some ways in which it may be wise to prioritize your investments.
1. Your employer makes related contributions
If your employer provides a retirement plan with related contributions, that is a great benefit.
According to a study by Vangard 2021, 59% of employers will make related contributions by 2019. Unfortunately, about 40% of employees lose the entire match due to non-participation. And not making enough contributions to qualify for the full match means you are losing money as part of your compensation package.
Under the most common matching structure, the employer corresponds to $ 0.50 per dollar for the first 6% of the employee’s salary. For example, if you make $ 50,000 a year and donate $ 40,000 ($ 3,000) to your 401 (k) salary – your employer will contribute $ 1,500 to your pension.
If your employer offers related contributions, you should give priority to using the entire company match instead of paying off debts.
2. Your back on retirement savings
According to the Federal Reserve, approximately one-fourth of adults do not have any retirement savings. If you have not yet saved for retirement, it may be reasonable to consider repaying your loans in advance to focus on building your pension fund.
When you start saving for retirement earlier, you will have less money to pay for living expenses after retirement. Market returns and yard demand are powerful tools to help you build your nest over time.
For the rest of your life – for example when your loans are repaid – you will have to work harder to meet your retirement goals and save a lot.
3. Your loans have low interest rates
Depending on the type of loan you have and when you repay, they may have lower interest rates. For example, from July 1, 2020 to June 30, 2021, a direct subsidy for undergraduate students had an interest rate of 2.75%.
Compare your loan interest rate with your expected return on investment. Traditional, your annual return interest rate for your retirement investments is usually between 4% and 7%. If the expected return is higher than the interest rate on your loan, it may be a better option to prioritize your investments.
Hybrid approach – Pay off student loans and invest at the same time
Most people choose one goal or another, but not all. You can use a mixed method and work for both goals.
Think about how much extra money you have each month for your financial goals. Pay that amount in half and contribute to each goal. For example, if you have $ 200 left over after you have paid all your bills, invest $ 100 in your pension and use the remaining $ 100 to make extra payments for your student loan.
If you focus only on one goal at a time, you will still grow and improve your overall financial picture.
Choosing a debt repayment strategy
If you want to start cutting off your student loan balance, you can speed up your payment by using debt consolidation or debt consolidation methods.
Depending on your thinking, it may be best to focus on low interest rates. Or they may be more motivated than ever to repay their debts on a smaller scale. Whichever payment strategy you use, you will repay your loans quickly and achieve your goals soon.