Many recent graduates continue to be encumbered with student loan debt. In fact, there are now $1 trillion of federal student loans that are outstanding, which is greater than all of the credit card debt owed by borrowers. If you happen to be building a nest egg either on your own merit or through a generous inheritance, paying off at least part of that student loan debt may be an option? Should you or should you invest it?
Should you pay off any of your student loan debt?
You should certainly pay off at least some of your student loan debt. If you have all fixed-rate student loans, you should focus on the debts with the highest APRs and balances. Those with student loans that have variable interest rates, may need to compare and forecast the expected rate in the future. We can expect rates to stay low at least through the end of 2014.
How much should you pay off?
As for whether you should pay part, half or all of it off now, that largely depends on your financial position. If you use part or half to pay off your student loans, make sure you still have enough cash for emergencies. Generally speaking, you should have at least 6 months’ worth of living expenses available at any given time for unexpected events. If you already have an emergency fund and no other debts, then you can certainly start with paying off some of the debt with the highest interest rates. As for investing some, you’ll need to achieve at least a return equivalent to the interest rate on the debit for this option to be worthwhile. The stock market performed very well in 2013 with returns over 30%, but the next year will likely result in more modest gains of 5% to 10%.
What about consolidating student loans?
Consolidating can simplify the loan repayment process by centralizing your loans to one bill and you can lower monthly payments by extending the term of repayments. There also may be new options with the consolidated plan and the ability to lower your overall rate. However, it’s possible that you could lose some benefits of your existing loan plan. Be sure to compare your options. The other thing to note is that when your loans are consolidated, they cannot be removed. Thus, you need to be sure you want to do this and the benefits outweigh the drawbacks.
More questions? Browse answers or get your student loan questions answered online.
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