Consolidating student loans nelnet
But if you’re older, wiser, and deeper in debt, how do you attack those student loans?Specifically, if you find yourself with extra cash, should you pay down student loans early? I recorded this video to very quickly answer why: We’re going to get into the pros and cons of repaying student loans early versus hanging onto that money for things like an emergency fund, retirement, a home, or even just having fun.The bottom line is that repaying student loans is an obligation. Fortunately, if you’re having trouble paying, there are built-in protections like reduced payment plans, grace periods, and forbearance—an extreme program in which you may be able to suspend payments for a brief period of time. “Bad” debt is bad because it either has a wicked interest rate or is designed to pay for depreciating assets like a car.In some cases, you may also be eligible for partial or complete loan forgiveness if you work in public service. However, in an effort to make sure everybody “gets it,” we’ve oversimplified the equation. “Good” debt is “good” because it’s used by appreciating or income-producing assets like a business, real estate, or an education.So even a small difference in expected return and loan APR can add up to big money over time.In Scenario 2, the high 10 percent loan APR is quite a bit higher than the seven percent expected return, and investing instead of repaying the loan early means losing nearly ,000 over 20 years. In our final example, the loan and expected annual investment return are the same.
There is, however, one big advantage to Investment B: The return is guaranteed.
So what expected rate of return should you use to make your own calculation?
I think 7 percent is a totally reasonable target and may even be on the conservative side.
Although I personally believe you’ll do better than 5 percent investing in stocks over the long run, many people may disagree.
In this case, whether you invest or repay the loan early, you come out even.