There are so many great things that come with higher education that it is hard to know where to start. Of course, all those positives come with a price. For most of us, that price is known as student loans and those first shocking invoices after graduation.
Once you start repaying the loans, a question will quickly develop. Should you invest your extra money and pay the loans off in one fell swoop or are you better of throwing the extra money at the balance each month?
What extra money? This is probably the first question on your mind. You have it. Trust me. Can you set aside $5 a day? Maybe skip that gourmet coffee each morning? If so, you’ll have nearly $2,000 at the end of the year. Not bad, eh.
If you have student loans, a good percentage are government oriented. They tend to have low interest rates on them compared to private loans. This may tempt you to pay them down first. In truth, you might want to invest that money and pay them off later.
To figure out the best option, consider the difference between the cost and return. If you find an investment that pays 10 percent in dividends like Canadian oil stocks versus a 6 percent interest rate on your student loans, the investment options looks pretty good.
Two other factors need to be considered. Will you have the discipline to leave the investment fund alone? If so, is it still wise to go with the investment strategy if taxes are figured in? Capital gains are generally taxed at a rate of 15 percent, so do the math.
For many people with student loans, the answer to this question really comes down to their personal attitude towards debt. Some prefer to save and assume they will be able to produce enough of a gain that they will come out ahead even after taxes. For others, knocking down the balance is the key.
If you prefer to work on the loan balances directly, how will you approach it? There is one strategy that works well. The first step in applying it is to break down your loans from one giant debt into smaller pieces you can financially and emotionally handle.
Your first step is to pick the smallest loan. After you make all your monthly payments, apply whatever extra cash you have to that small loan. Be disciplined. Since the loan is probably relatively small, you should be able to pay it off quickly, often in less than a year.
Once the loan is paid off, you will feel a sense of accomplishment. Yes, even though it is a relative small amount of your total debt. The point is to get positive feedback, which helps with your discipline. Now do the same with the next smallest loan.
Invest or pay directly? The choice is a personal one. As long as you remained disciplined, either should get you where you want to go. As an added benefit, paid off student loans will crank your credit report score up dramatically.
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