When paying off student loans, it’s easy to forget about other goals. However, it can be important to remember to start investing.
Americans have $1.5 trillion in student loan debt. It’s no surprise that many of them feel overwhelmed by the debt—and want to pay it off as soon as possible.
If you carry student loan debt, you’re likely looking forward to the day you’ll make that last payment. With your student loans out of the way, it’s possible to feel like you can start making financial strides in your life. However, it’s important to avoid letting student loans take over your life and your financial goals, according to Dara Luber, senior manager, retirement product at TD Ameritrade. Many people wonder whether to first pay off student loans or invest.
“Even with student loan debt, you can start investing, and it’s important that you do,” Luber said. “Put together a plan that allows you to pay off student loans but still work on other goals.”
Start by understanding how much you owe. Because student loans are issued each year, there’s a good chance you have several loans and are making several payments at once. Here are some steps to create a student loan repayment plan before you determine whether to prioritize paying off student loans or investing toward your future.
If you want to be more effective at paying off student loans, it’s important to have a thorough understanding of what you owe. For federal loans, check the National Student Loan Data System for Students (NSLDS) to see how much you owe and who your servicers are.
If you have private student loans but can’t find records, look at your credit report to see which companies are listed.
Keep track of all the information in a list or spreadsheet. You should know the monthly payment, total amount owed, repayment term, and interest rate. Set up online accounts with your servicers so it’s easier to manage your loans and update information as needed.
One way to streamline your ability to pay off student loans is to consolidate your federal loans and refinance your private loans.
“Getting everything in one place makes it easier to manage your repayment plan,” Luber said.
Understand, however, that if you consolidate your federal loans, it generally lengthens the term, which may affect the amount of total interest you pay. Refinancing private loans can also mean a longer term along with lower monthly payments. You can still make a plan for paying off student loans faster, though. These lower payments can give you some initial breathing room to consider your strategy and decide which goals to pursue.
Figure out how much extra you have each month to put toward paying off student loans faster. Add up all of your expenses and then compare them to your income. Hopefully you have enough money to pay your bills and make your student loan payments.
If your income isn’t high enough to cover your costs, ask your federal loan servicer about an income-driven repayment. You can get even lower payments until your financial situation improves.
When you create your budget, if you find you have extra money, you can decide how much extra you can pay toward your student loans in addition to your monthly loan payments. The more you put toward paying off student loans, the less you’ll pay overall—and the sooner you’ll be free of student debt.
Automatic payments can help you stay on top of your repayment responsibilities by ensuring that you don’t forget and miss payments. Maintaining on-time payments is a key part of your credit score, so automating payments can assist with keeping your finances in shape.
As you set up automatic monthly payments with your servicers, you can also set up extra payments. Paying extra toward your student loans can help you pay down the loans faster and reduce the total interest.
When you make extra payments, though, it’s important to find out from your servicer how to designate the money. In some cases, the servicer will simply put any excess toward the next month’s payment—starting by applying it to interest and any fees you owe. Ask how you can ensure that your extra payments are directed toward the principal, which can reduce the overall interest costs.
Of course, for many people with student loans, the big question is whether to use any extra money in the budget to pay off student loans or to invest it toward retirement. You might be tempted to put all your extra money each month toward tackling your student loan debt, but that isn’t always the best choice for each person, according to Luber.
“Starting to invest now has its benefits,” Luber said. “The longer you have money in the market, the better compounding can potentially work for you.”
Luber recommended using at least some of your extra money each month to begin saving for retirement.
“If you have access to an employer retirement plan, especially if there’s a match, at least put a little toward retirement,” she said. “It doesn’t have to be a lot, and you can still make extra student loan payments.”
Depending on your loan rates and how your investments perform, investing could pay off better in the long run. Student loan interest is often tax deductible, and the rates are lower than many other types of debt, such as credit card debt. Over the years, annualized returns from the stock market might be higher than the cost of your student loan interest.
Deciding whether to prioritize paying off student loans or investing doesn’t have to be an either-or proposition. Review your budget, and if you can, divert money toward both investing for retirement and paying down your debt faster.
If you have a student loan, take stock of your entire financial situation. See if there’s a way to reduce your required monthly payment and free up some cash flow.
“The debt can feel so overwhelming that you forget everything else,” Luber pointed out. “However, it’s a good idea to take a step back and see what you can do to work on other financial goals while paying off student loans.”
With a budget in place, decide how much you want to put toward paying off student loans as well as investing. Remember, you don’t have to choose one or the other. You can pay off student loans and invest at the same time, providing the potential for a better future while you get rid of your debt today.
Miranda Marquit is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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