Managing College Loans: Tips for Paying Off Debt and Planning for Grad School

[gravenewworld]

Student Debt Is Piling Up

* Tuition costs have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics -- twice as much as graduates owed a decade ago.

* Nearly a quarter of recent grads owe in excess of $25,000.

* While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

http://news.yahoo.com/page/parade-earn/your-money





Yeah, that $45,000 job that you get out of college simply doesn't buy what it used to.

 

[huckmank]

A single person should be able to pay off ~10k on loans each year (easily) with proper budgeting if they make anything close to 50k (take home), in my opinion.
I belong to a family of 6, living in California (crazy cost of living), with less than 50k of total earnings... so it shouldn't be too hard to save 10k a year if you're single, as long as you don't buy a nice big house, a bimmer, and eat out at fancy restaurants each night.

I really don't understand why anyone would want to quickly pay off loans with interest rates at ~6%. The money spent quickly paying off these low interest loans would be put to much better use in a index fund averaging 10% over the long term. With rates where they are, people should be getting 40 year home loans and slowly paying off their student loans.

If you have a loan at 6% and a fund averaging 10%, every dollar you use to pay off your loan will cost you 4% a year in expected returns.

 

[bravernix]

I really don't understand why anyone would want to quickly pay off loans with interest rates at ~6%. The money spent quickly paying off these low interest loans would be put to much better use in a index fund averaging 10% over the long term. With rates where they are, people should be getting 40 year home loans and slowly paying off their student loans.

There are always risks in investing money and it's also nice to not have any large debt.

 

[Poop-Loops]

Plot two graphs. One doing what you described, paying off a 6% loan slowly and investing in a 10% return investment. See how long it takes and see what amount of money you end up with after you pay off all of the student loan.

Next make a graph showing what would happen if you paid off all the loan first, then put all the money you'd spend on the loan into the investment fund. After the same amount of time, see how much money you end up with.

No, I don't know what to expect, I'm just interested in seeing the results and don't feel like graphing it myself. :p

 

[huckmank]

There are always risks in investing money and it's also nice to not have any large debt.

There are always risks in life, but an index mutual fund w/ a rebalancing asset allocation of 40/60 bonds/stocks has an average return of 8% with the same standard deviation of US bonds. A 60/40 blend has only slightly increased standard deviation w/ 10% return.

I'm sorry, but paying off <6% fixed loans quickly when inflation is 4% and rising is just foolish.

 

[lubuntu]

I have a follow up question not sure if this should be a new thread.

In general, are you able to defer your undergrad loans while pursuing a Ph.D.?

 

[AsianSensationK]

Plot two graphs. One doing what you described, paying off a 6% loan slowly and investing in a 10% return investment. See how long it takes and see what amount of money you end up with after you pay off all of the student loan.

Next make a graph showing what would happen if you paid off all the loan first, then put all the money you'd spend on the loan into the investment fund. After the same amount of time, see how much money you end up with.

No, I don't know what to expect, I'm just interested in seeing the results and don't feel like graphing it myself. :p

This is the right thought process.

Certainly, you will return more earlier with that investment strategy than you would save in interest expense. but you also want to show that your total savings in interest expense over the life of the student loans can't outweigh the gains you expect to make using this investment strategy instead of paying off the loans. I'd be curious to see the results too.

 

[bravernix]

I'm sorry, but paying off <6% fixed loans quickly when inflation is 4% and rising is just foolish.

Inflation is what would actually convince me of this more. I do understand the concept of interest rate spread and taking both into account certainly makes for some interesting possibilities. I also recall seeing something about student loan interest rate tax deduction as well, now that I think about it.

 

[Benzoate]

please somebody tell me the best way to pay off loans that will amount to $60000. Right now , I cannot afford that much. I only make $7 an hour . Do you ever think about how you you will pay off college loans as an undergrad

 

[huckmank]

This is the right thought process.

Certainly, you will return more earlier with that investment strategy than you would save in interest expense. but you also want to show that your total savings in interest expense over the life of the student loans can't outweigh the gains you expect to make using this investment strategy instead of paying off the loans. I'd be curious to see the results too.

Open up Excel and do it. If you invest money at .00000001% higher rate of return than you borrow, you will come out on top.

Think of it this way. Say I have $100,000 in loans at 6% and I have a net income of $100,000 a year. I have a fund that returns an average of 8%.

If I pay off the entire loan on day one and then invest all of my income for the next 29 years I will be investing 100k a year for 29 years at 8% interest. Using interest tables, my final balance is 103.9659*$100k ~ $10,400,000.

If I pay off the loan over 30 years I will be paying 0.0736*100k = $7,360 a year in interest/principle payments. That leaves $92,640 a year for 30 years that I'm investing at 8%. Using the tables once more 113.2832 * $92.64k ~ $10,500,000.

This ignores the fact that interest payed on qualified student loans and primary home mortgages are tax deductible which also works to the advantage of slow pay-downs of these loans.

 

[Poop-Loops]

Okay, we understand that, but what we don't know is what would happen if you simply paid off the loans really fast and then jumped into investing. You'd start off later, but you'd get 10% instead of 4% net profit, right? So we would like to know which one makes more sense.

 

[huckmank]

Okay, we understand that, but what we don't know is what would happen if you simply paid off the loans really fast and then jumped into investing. You'd start off later, but you'd get 10% instead of 4% net profit, right? So we would like to know which one makes more sense.

But that's exactly what that example addresses. Under any circumstance, if your loan has a lower interest rate than the rate of return of your investment, it is always better to invest. If you didn't care about carrying the debt throughout your life you could actually just pay the minimum forever and ever, NEVER pay off the loan, and invest the money instead. You see, unlike other loans, federally backed student loans vanish with the death of the loanee and don't get transferred to the estate. I wouldn't seriously suggest this, as it's somewhat sleazy, in that you're basically forcing the taxpayers to pay for the default on your loan (aka, your death).

Keep in mind, that these examples ignore risk. It is of course riskier to invest. But over the long term (think retirement), index funds have historically returned ~10%. If you assume a growing economy, then it makes sense to invest in the economy as a whole, which is what is happening with an index fund. They're not trying to beat the market; they are the market.

 

[huckmank]

Here's an Excel graph. The y-axis is ending balance of the fund and the x-axis is the amount of years taken to fully pay off the 100k loan. It assumes that all 100k that isn't payed toward the loan in a period is payed instead to the fund. Again, I assume 6% loan and 8% return.

The numbers may be slightly off by much less than a percent, because Excel does something strange with fv/pv functions and I didn't want to look up the proper usage. The difference doesn't matter and should affect all plots equally.

http://uploader.ws/upload/200804/Fund.jpg

I'm done with this diversion, btw. Sorry for the spam. Suffice to say that if you can safely invest at a rate higher than your cost of money, I would suggest you do it.

 

[Laura1013]

In general, are you able to defer your undergrad loans while pursuing a Ph.D.?

Yes, since you'll still be a student. I'm not sure if full-time student status matters.

I also recall seeing something about student loan interest rate tax deduction as well, now that I think about it.

That is correct, but deductible interest is capped at $2500.

 

[Barfolumu]

please somebody tell me the best way to pay off loans that will amount to $60000. Right now , I cannot afford that much. I only make $7 an hour . Do you ever think about how you you will pay off college loans as an undergrad

Winning the lottery might be the best way, but I'd recommend consolidation and one month at a time.

*shrug* It's all about what you want to do. I could've lived debt-free, with room mates, if you'd signed on at your local Wal-mart right out of High School, but I didn't want to do that. So, I keep doing what you want to do, since the opportunity is right before me with the help of loans, because if I'd been more inclined to make decisions based upon my economic welfare, then I would've majored in business or pre-med.

 

[duke_nemmerle]

I intend to declare bankruptcy when I graduate. My credit will be wiped clean after seven years which is better than trying to pay off the loan over twenty.

Hopefully you'll realize that there's NOTHING you can do to get out from under college loans, short of dying or sneaking out of the country. They will take your income taxes without taking you to court, take your social security, whatever they have to do.

Spend some time at creditboards.com to see what I mean :)

 

[brett812718]

I am going to Penn State this summer (summer semester) and will probably end up borrowing about 34000 per year . I plan on studying astronomy and astrophysics. I met with the person in charge of their undergraduate astronomy program and she said that all students who wanted to go to graduate school had their full tuition paid and were given an average stipend of 14000. I figure it will take me 3 years to complete my BS degree after I apply credit I have earned with AP tests and college classes. Does anyone think it will be possible to pay back 102000 over 25 years If I decide to go for a Phd (As far as I understand it anyone who wants to work as an astronomer/astrophysicist has to get their Phd)?

 

[Poop-Loops]

Depends on what kind of job you get. Still, I'd apply to as many scholarships as possible, because $34k/year is a LOT of money.

 

[Laura1013]

Does anyone think it will be possible to pay back 102000 over 25 years If I decide to go for a Phd (As far as I understand it anyone who wants to work as an astronomer/astrophysicist has to get their Phd)?

Of course it's possible. There are a lot of people who do just that, some even quicker than 25 years. I agree with Poop-Loops that you should look into scholarships and fellowships to help ease your burden.

 

[Benzoate]

Of course it's possible. There are a lot of people who do just that, some even quicker than 25 years. I agree with Poop-Loops that you should look into scholarships and fellowships to help ease your burden.

what is a fellowship?

 

[Greg Bernhardt]

what is a fellowship?

A study grant of financial aid, usually awarded to a graduate student.

 

[undrcvrbro]

The FAFSA really screws over those of us who belong to families that aren't either rich or extremely poor. I know a girl who's total family income is about $50,000...she got about the total tuition...in LOANS! Absolutely NO grants at all from FAFSA. It looks like she's going to be paying off student loans for quite a while..because God knows her parents can't help her.
It is truly ridiculous that education should cost this much. At least for most of us.