Money smarts.

I proudly told Michael tonight that 7 days ago I resolved to pay my 20 year student loans in 7 years (a random number I picked). Proudly told him that I made a 600 dollar payment this month (the day I made my resolution) on a 200 dollar minimum. I’m also going to be eating ramen more often now. He groaned.

He said the point of student loans is to take my time with them. And accumulate money that will grow in interest over the years and that if I paid all my debt now, I’d have nothing later.

Gah?

GAH.

“Linda, student loans are GOOD debt.”

“But, it’s my ONLY debt so wouldn’t it also be my BAD debt?”

He sighed and told me he didn’t have time for me right now and hung up. Haha… :)

Huh.

I want to be money smart but I really don’t get it.

  • kim

    dude….i don’t get it either. :-/

  • Ok kids… you gotta think long term here. It’s okay to carry debt, especially if you aren’t planning on purchasing a home anytime soon, or need excellent credit for a huge loan. So here’s the gist of it.

    If you save $100 a month at a lowly yield at 4% per month, here’s the break down.

    Year 1: 1$,226
    Year 5: $7,397
    Year 10: $14,774
    Year 20: $36,800
    Year 30: $69,636

    Now if you don’t have that $100 to put in each month at the beginning of the 30 year period and you pay it all off in 7 years, your $100 per month at 4% interest would be 7 years behind on the escalating scale of compound interest.

    The interest on student loans is already low enough. The long term benefits of
    saving those extra few thousand dollars will make you wealthy in the future. Think of the monetar difference btwn 30 years versus 23 years. If you have an extra $400 a month to put into a compound interest account, DO IT. Let the govt subsidized student loan collect it’s paltry interest. You’ll be making more by saving that $400 each month in the long run.

    I know debt can be annoying, and that’s why ppl (especially asian ppl) try to pay it off as quickly as possible. However, loans give you leverage, and allow you advance faster, hence why white imperial capitalism was able to dominate the world market so quickly. Everybody’s playing the game of capitalism now, even the communists!!!

  • Matt

    he is right, invest the extra money in an interest bearing account, preferably compound interest, and let youre money work for you and not the other way around. Youll thank yourself later when you have the extra cash for yourself and you still get your student loans paid off. Make the payments, maybe make an extra payment once a year to whiddle it down some but other than that, go for the money.

  • Linda

    But if I consolidated with a private lender? And the loans interest is 5 percent.. which is higher than my savings account? and about the same as my CD ..?!?

    I think I will be picking Michael’s brain this weekend.

  • So the idea is that you still put as much money as you can aside, but instead of paying off the loans, as much as possible goes into some kind of savings account that pays 4% interest. What accounts do this and let you have a small minimum?

    And if you did want to buy a house? Would you pay off your loans first?

    Like, I get what Michael is saying, but it’s like technology, unless you really keep up, you have to rely on other people or you have to keep it simple. Simple is shovel money into the loans until they are done, then take out another loan to buy a house, then shovel money until you own your own home. And while you are doing these, you keep trying to build up cushions in case stuff happens. Because it always does. And I realize that’s not the smartest thing, and Michael will have much better advice, but I already spend hours of free time keeping up with the tech stuff. I can’t do financial too. And so what do you do, ya know?

  • How many loans do you have that you need to consolidate?

    And you can still purchase a house or condo or whatever so long as the monthly mortgage payments are less than 1/3 of your monthly income. Another perk of maintaining those payments is that you are upping your credit score. Creditors love to see people who can keep up with their debt.

    Yea- 5% is pretty low, I dont know if you can find a private banker who can consolidate that and make it even lower, but if you’d like, I can contact my banker at Chase and have him check for you.

    Remember, it’s 5% interest only on however much your entire loan is. You are paying down the loan anyways with the $200 monthly payments. The amount you save and accumulate in a compound interest account will surpass the amount you would’ve saved by paying it down early. I’d break it down into an excel worksheet, but you can talk to any certified financial planner. They’ll tell you the same thing.

    It’s a comfort thing. Are you comfortable enough with debt? And there are a lot of banks out there which give 4% or more. The better thing is to put it in CDs which yield at 5% or 6%, but that ties up your money if you need it. Money Market accounts are pretty nice; however, I think there is a high minimum that you must keep.

    I don’t think it’s really not that hard. Just pay the $200 a month, and shovel the rest of the money into that interest account. Go to your bank, talk to a personal banker. That’s what they are there for. Develop a relationship with the banker. The banker is your friend and will notify you of great interest deals that they are offering. Network network network :).

  • Oh yea– and you’re gonna hate me… I can’t come in until monday afternoon or tuesday. I’ll pay!!

  • Linda

    sigh. I will see you MONDASY then. You better not stand me up. I’ll.. kill you while you’re showering.

    As for how many loans i have to consolidate. I consolidated 5 already and interest is at 5 percent. My CD yields just below 5 percent. I guess I get you. I’ll save my extra to put it higher interest ..stuff?

    Ill talk to a banker soon.

  • kim

    oooooooooh.

  • Linda

    so another response I got:

    You don’t even have to try to beat Student Loan debt, in most cases.

    Turn your money over to just about any no load fund and you’ll beat the
    pants of student loan debit.

    Again. Debit is best when stretched over the longest possible time,
    because the repayments in later years are made with smaller dollars.
    Dollars that are smaller because of inflation and also a smaller portion
    of your income.

    If you took every dollar that you want to pre pay on your student loans
    and put it somewhere else, (just about anywhere else), you’ll be better
    off.

    Buying a dining room table is better than prepaying the student loan,
    because the cost of the table will be higher each year in the future,
    and the cost of repaying the debt will be smaller.

  • Cindy

    that’s…too much math and reasoning for me to follow, haha. oy vey.