When you have massive student loan debt, usually, you are tempted to clear off your debt as fast as possible. You may have put a hold on other financial goals to get the full concentration to eliminate your debt.
However, time is your greatest asset when it comes to your future investment. Many years ago, the traditional advice was to prioritize investing whenever possible. But is it still the case now? As you may know, the interest rates on student loans keep changing.
So it is highly essential to find the right balance between paying off your student loans or investing for the future. This guide will explore five questions to ask yourself whether you should invest or clear off your student loans.
Do you make the required payments on your loans?
It is advisable to make on-time regular payments to your loan lender for the required amount due each month to:
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- Avoid damaging your credit score.
- Increase the amount you pay in total.
- Avoid losing the chance to qualify for a student loan.
You need to know more about student loan repayment strategies, particularly if you want to balance different debts. Through that, you can make the right decision in terms of your financial goals.
What is the current interest rate on your loans?
Some people who completed a graduate school in the last ten years have loan debts with interest rates above 6%. According to New America, the average student loan interest is 5.8% with all student loans.
It is a general recommendation that you concentrate on paying off the higher interest rate. If you have student loans with interest rates below this mark, you can make the required monthly payments and invest the remaining amount.
Keep in mind that if there is a low-interest rate, you can refinance your student loans and acquire a lower interest rate. That can decrease your monthly payment.
Is it possible to refinance your student loans?
Another way to take on high-interest rates is through refinancing. When you opt for this option, you can potentially decrease your monthly payments or interest rate. Not only that, but you can reduce your costs over the life loan. It helps you pay off your student debts faster and save extra money towards your investments or retirement.
Do you take advantage of your 401(k) money?
Many employers in the United States provide matching contributions when contributing to your 401(k). The matching contributions differ by company, and it is usually capped at a specific percentage of your salary.
You can contribute substantially to your 401(k) and take full advantage of your employer match. If not, you could be wasting “free” money.
Have you considered maximizing your retirement contributions?
As you may know, there is a limit on the amount you contribute to your retirement accounts each year. The 2021 contribution limits for 401(k) and Individual Retirement Account (IRA) remain the same as the 2020 limits. That is $19,500 towards a 401(k) and $6,000 towards IRA.
So you can consider using any extra funds to get rid of your debt. But if your contributions are far from these limits or have not started contribution yet, you may want to consider increasing your contributions.
What other financial goals do you have?
Your financial goal is probably not only paying off your student debt and saving for retirement. You need to have other short-term and long-term financial objectives to balance. For example, you may renovate your home to cater to the growing family, paying for your child’s education, etc.
To develop a thorough and effective financial plan, you need to understand your fundamental goals, risk tolerance, cash flow, and tax implications. You may need to hire a financial expert to help you get through these things.
What To Prioritize Before Paying Off Your Debt or Investing
Before you consider investing, it is necessary to ensure you make on-time minimum monthly payments on your student loans. Then, before you decide whether to invest or pay off your student loans quickly, you need to ensure you meet the following financial milestones. That will help you be in a strong financial position.
Start an emergency fund.
According to Dave Ramsey, you should have $1,000 as your starter emergency fund. You should have an emergency fund before allocating funds for student loans or investments.
Maximize your retirement contribution
Ensure that you have enough money in your retirement accounts to save for the future. You do not know what lies ahead.
Decrease your interest rates
If it is possible, lower your interest rates through refinancing. It can help you save money and pay off your student loan debt ahead of time.
Get Student Loans Forgiveness
There are multiple ways to get rid of your student loan debt and end your struggles for the better. If your university has done any misconduct towards their students and caused harm, you may have a clear shot in getting student loan forgiveness. A lot of universities and institutions have already lawsuits against them and you can benefit from those! Such institutions include ITT Tech, Art Institutes, and Phoenix University Lawsuit.
Remember that paying off your student debt goes hand in hand with investing. And that is why you should consider several factors regarding your financial situation. Your potential returns, loan interest rates, including your financial goals should all affect your decision-making process.
When you consider all these factors, you will see all perspectives and make a better decision. Sometimes, that can mean investing small and paying off your debt at the same time. The key here is balance. Go for what works for you.