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To invest or to save???

Posted on: 18th Mar, 2010 04:18 am
I have loads of student debt. I'll be graduating soon and would be earning somewhere around $70k - $90k. I plan to save at least somewhere around 20k. I may invest this amount somewhere. After graduating, I would owe around $150K total in student loans. Depending upon the interest rate that I've (it's low), I'll have to pay around $1600 per month for around 10 years if I pay minimum payments. Now, what I would like to know is that would I be better off to pay down my debt to a reasonable amount or invest money at the highest-return investment?
Thanks in advance…
Hi Hermion,

In my opinion, it will be worth your while to pay down your debts to a reasonable amount. If you can save some money and use that to make extra payments towards your debts, you can save a considerable amount of money in interest.

It will take a lot of time to pay off the debts if you keep making just the minimum payments. In that case, you will end up paying a lot of money in interest. In stead of this, if you pay off your debts early by making extra payments, you can save money in the long run and can lead a debt-free life. Paying off these debts will also help you improve your credit scores so you can qualify for a larger debt in future.
Posted on: 18th Mar, 2010 10:22 pm
To Hermion,

If you intend to save money, a standard repayment schedule is the best option. In a standard plan, you will be required to pay a fixed amount of money every month. The payment may change a little if the interest rate on student loan is variable, but more or less it remains the same. The monthly payments under the standard repayment plan will be higher because the term of the loan is shorter, usually 10 years. But you will end up saving a lot of money in interest as the interest will not accumulate over a longer repayment period as under the extended repayment schedule, which can extend up to 25 years.
Posted on: 31st Mar, 2010 02:04 am
Heard about a student loan repayment plan based on income. Anyone knows about it? I have a Stafford loan which I want to pay off, but can't afford the payments under standard repayment plan. Am I eligible for the income based repayment plan?

Any info on this would be helpful.

Thanks.
Posted on: 01st Apr, 2010 12:16 am
Hi,

The Income Based Repayment (IBR) plan is a good option to repay your Federal student loans. This repayment plan has been effective since July1, 2009. It aims to limit the monthly repayment amount within an affordable limit depending on your income and family size. If you qualify for the IBR, you monthly payment will be less than the amount you would have to pay each month under the 10-year standard repayment plan.

The following types of Federal student loans can be repaid through the IBR plan:

• Stafford loans
• Grad PLUS loans
• Consolidation loans made under either the Direct Loan or Federal Family Education Loan program

However, student loans on which borrowers have defaulted, Parent Loans for Undergraduate Students (PLUS) and consolidation loans that paid off a parent PLUS loan do not qualify to be repaid under the IBR plan.

Eligibility:

You can repay your student loan under the Income Based Repayment plan if your Federal student loan debt is high as compared to your earnings and family size. Your monthly repayment amount under the IBR plan has to be less than that under a 10-year standard repayment plan.

Thanks,

Jerry
Posted on: 01st Apr, 2010 02:20 am
Everything else equal, I would compare the interest rate of the student loan to the most likely rate of return you feel you would receive on your investments. I would then contribute more money towards the item with the higher interest rate.


If the investment would have a higher return then you will earn more money by investing than you would save if you put the money towards the lower interest student loan.

However, there is something to be said regarding peace of mind, if you can reduce the amount of a large student (or any other type) loan.
Posted on: 28th Apr, 2010 11:45 am
Hi,

I'd consider the interest rate that is being charged on the student loan. It is a good idea to pay off the debts as quickly as possible. But it's also important to save some money for future emergency.

If the interest rate of my student loan is more than say 8%, it would be a good idea to pay off the debt before saving for future. The average rate of return on long term investments in the share market is about 8%. Thus, if I'm paying more in interest on my student loan than I'd earn on my investment, I'd consider repaying it before saving money.

On the other hand, if the interest rate on the student loan is less than 8%, I'd like to save money for future use rather than use it to pay off the loan. If the interest rate on my student loan is around say 6-8%, I'd try to strike a balance between repaying loan and saving money. If the interest rate on the loan is as low as something around 6%, I'd continue making the minimum payments on the loan. If I can save say $100 a month, I'd consider using $50 to make extra payments towards the principal of the loan and the rest of the $50 towards saving.
Posted on: 06th May, 2010 11:00 pm
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