The amount in student loans a graduate from college has to pay is increasing every year. This causes many college graduates to start with seriously low or negative net worth, and it makes the process of building wealth over the long run incredibly difficult.
According to Edvisors, the average amount in student loans per borrower in the United States is $28,973 as of June 2015. Now, remember that this is just the average: Some student are graduating with over $100,000 in student loans.
Imagine that. You go to college, and you walk away with a piece of paper and a mortgage payment. This is quite depressing, especially if a person accepts the minimum payment for the 10-year payback period.
So, without further delay, let's detail ModernCent's three reasons to never settle on the minimum student loan payment:
1. Interest, Interest And More Interest
The more money you pay toward your student loans, the faster you will pay them off and the less interest you will have to pay in the long run. This is a straightforward proposition, but it is easier said than done.
If you were swimming in cash to begin with, you wouldn't have had to take out the loan in the first place. So, let's find the incentive through simple math. Why should someone work hard to pay more toward his or her loan balance?
- Consider the $28,973 loan balance stated at the beginning of this article.
- The loan's interest rate is 4.29 percent.
- There's a 10-year payback timeframe.
- Therefore, the monthly minimum payment will be $297.
So, with all the above assumptions laid out, a former student will pay a total of $6,709 in interest alone. But remember that the entire principle still has to be paid off as well, so the final amount paid for the student's education is $35,682.
That is a lot of cash, and it could have been used for investments or the down payment for a home. Is there a way to offset this financial pain caused by the debt?
Yes, but you have to pay more each month toward the debt. Let's assume you decide to pay $100 more each month toward the debt. What would this do?
Well, you would be able to pay your student loan off in seven years, instead of the original 10 years. The great part is you will only pay $4,586 in interest. That's a savings of $2,123.
Is it worth it? We think so, and we suggests that when you pay off your debt, it's wise to begin investing and putting your extra money to work for you.
2. Financial Opportunities In Your Favor
If you only pay the minimum payment each month toward your student loans, you will not save the $2,123 in interest payments described above. But let's assume you do pay the $100 extra each month.
This means you will pay your loan off three years early. Now, let's make one more assumption: You learn how to invest your money and create a dividend portfolio.
You are able to invest $397 each month for the next three years, and you would have a sizable investment in three years. By the time the other people paying the minimum payment each month finishes paying off their student loans, you could have a dividend stock portfolio valued at $15,666. Also, you could be receiving approximately $783 a year in dividends alone.
Wow, so for $100 extra a month and by attacking loans, you pay your loan off three years earlier, invest that money and become positive $15,666 in net worth. Your peers who did not pay the little bit extra have nothing.
Don't let these financial opportunities slip away. Pay more than the monthly minimum payment.
As explained earlier, the three years of extra freedom from debt gave you the ability to begin building investments. Now, here is the exciting part: The three-year difference between you and your peers will make a huge impact by the time you both reach the retirement age of 67.
Let's discuss this in greater detail: Assuming you started your retirement account instead of building a dividend stock portfolio, you did nothing but passively invest your money from age 29 to 67.
You put your $397 in simple index funds, and you let your money compound and grow over time. You would accrue an average of 8 percent in returns each year.
By the time you reached retirement age, you would have an account worth $1,172,861. This is big money and very reasonable.
Now, let's compare how much your peers will have after they finish paying off their loans in 10 years, and start investing for retirement at age 32. If they do exactly what you did, when they reach retirement age, their account will only be worth $910,671.
That is $262,190 less than yours. So, here is the question: Is paying $100 a month more toward your student loans and paying them off early worth $262,190?
Yes. The idea is simple: Pay yourself first, and let time work in your favor.
Overall, the three reasons listed above detail why it is so important to pay more than the minimum monthly payment for student loans. You should strive to pay off debt as quickly as possible in order to allow the powerful tool of compound interest to work in your favor.
Don't delay, and begin to take control of your financial situation. Student loans can be conquered, even though the amount of debt continues to rise.
Remember: One step at a time in the right direction will lead you to wealth and financial freedom.