Do you know your student loan interest rates? Have you ever asked yourself if paying off your student loans aggressively is the right financial move? You could be leaving a lot of money on the table without knowing it.
Below is a video from Business Insider explaining why knowing your student loan interest rates are so important. They do a great job of explaining how paying off your student loans too aggressively might be a bad financial decision. Watch this video first then continue to read this post.
Things to consider before paying off your student loans:
Know exactly what your student loan interest rates are
Do you have low-interest rates (3%-6%) or high-interest rates (above 7%) on your student loans? If you have low-interest rates on your student loans paying them off aggressively is most likely not the best financial move. You are actually leaving money on the table.
History has shown having a return of 6-8% in the market is very reasonable. If you choose to pay off your student loans aggressively and not consider investing at the same time you are not making a good financial decision.
For example, if you are paying off your low-interest student loans with 3% interest as fast as you can. You are actually only getting a 3% return on those payments. You would be much better off making minimum payments on those loans and investing any surplus money. Your invested money should on average make 6-8% in the market leaving you with a 3% difference on return.
If you have high-interest rates on your student loans your best financial decision would pay them off as quickly as possible. For example, if you have student loans at 10% interest your rate of return is 10%. It’s better to pay them off quickly then try to invest and make more than 10% in the market.
For example, if you have student loans at 10% interest your rate of return is 10%. Chances are you are not going to make 10% return on investment in the market. Your best option is to pay off your high-interest debt as quickly and aggressively as possible.
Are your student loans tax deductible?
Consider the tax deduction you get when paying off your student loans. If you have a low-interest rate and pay off your student loans quickly you are losing out on any tax deduction you might receive.
Let the student loan calculator do the work
Check out this awesome calculator. It really comes down to simple math when deciding how to attack your student loans.
- Input your student loan interest rates.
- Decide if you can deduct the interest on the student loans.
- Pick your average return on investment to be safe use (6%-8%)
- Decide if your return on investment is taxable.
- Decide what tax bracket you are in. Investopedia has a great article to help you figure this out.
After filling out everything in this calculator you should get a much clearer understanding paying off your debt quickly or investing is the right financial move.
Always pay your student loans on time
Not paying your student loans is not an option. You chose to go to school and take out the loans. Make sure you are aware of all student loans attached to your name and get organized. Figure out when your student loan payments are due and set them up for automatic payment.
Not paying back your student loans on time or missing payments is a guaranteed way to wreck your credit score. Your credit score is a very important tool in your financial toolbox showing lending how responsible and trustworthy you are. Having a high credit score can save you tens of thousands of dollars over your lifetime by having lower interest rates on your loans.
Aim for a good balance
Considering this new information you have, decide a plan of action. Having a good balance between paying off debt and investing is almost always going to be your best bet. Your decisions now will impact the rest of your life so give them the proper attention they deserve.
Refinancing might be a good option for your student loans
If you have high student loan interest rates have you considered refinancing? This might be an amazing option for you. Not only will you reduce the amount paid towards interest, but you will have leftover money to invest with, thus giving you the biggest return on your investment.
We partnered with SoFi when we first started our blog. They have been able to help a TON of our readers make the right decision when it comes to refinancing.
Follow market history
Assuming 7-8% return on investment in the market is not out of the ordinary by any means. Actually recently (2017) we are up more than 20% using our investment account with Betterment. Too many people are afraid of the word “investing”. When in reality, if done correctly it is a driving force in growing your wealth.
A good article explaining this 7% return “rule of thumb” was done on The Simple Dollar. They use past historical data along with some words of wisdom from Waren Buffet himself.
It’s always good to note when talking about investing that “past performance is no indication of future results”. It’s always good to consult a financial expert when making financial decisions.
Before you start destroying your student loans, consider thinking about the big picture. Take a step back and take emotions out of it. The financial decisions you make in your younger years have huge impacts on the rest of your life.
If your goal is financial freedom then start putting a plan in place to make that happen. You got this!