Should You Pay Off Student Loans Early?

should you pay off student loans early it's a hotly debated topic in the personal finance world you have people like dave ramsey on one side who say you should pay off any student loans as quickly as possible then you have people like graham stefan on the other side saying you should pay off the student loans with the high interest rates quickly while only paying the minimum monthly payment on the lower interest ones as it makes more sense to invest the rest at that point we're going to break down the math on a few options and see what makes the most sense in the student debt riddled world we live in as always all sources are in the description below but first let's just get some basic pros and cons out of the way if you pay off your student loans early pro you pay less over the life of the loan the quicker you pay it off the less time interest has a chance to accrue this is a good pro for basic human emotions con higher monthly payments it's pretty simple but the more you put towards your student loans every month the less you have to put towards things like retirement or a home pro getting a head start on other financial goals the quicker that minimum monthly payment is out of the way the quicker you're able to put that required payment towards other things you have financial goals for con it takes focus away from other financial goals at the time if there are other financial goals you want to hit sooner than later focusing a large part of your monthly budget on this takes that budget away from other things like paying off a car loan pro improving your debt to income ratio if your debt to income ratio is out of control and preventing you from qualifying for a 30-year fixed-rate mortgage then it makes sense to improve your debt to income ratio of course i would personally prefer increasing the income aspect of this khan though it's rare there are debt forgiveness programs out there if you're well researched and informed on the potential program you may qualify for then maybe it makes sense to go for it there's always the chance that biden will forgive some of the public loans as well we'll see if this video ages well or poorly in the future so those are some basic pros and cons covering an important aspect of the student loan crisis are basic human emotions of course it makes sense that we want to see our debt to income ratio improve to see less debt on our credit statement to see less minimum monthly payments taken out of our bank accounts but should we be making financial decisions on human emotions or financial facts fact number one the amount of student debt in 2020 totaled nearly 1.6 trillion dollars more than twice the amount outstanding in just 2008 fact number two since 2004 student loan debt has risen faster than other household debt and has surpassed both auto loan and credit card debt in 2010. student debt is also the second largest source of household debt trailing only mortgage debt fact number three the percentage of households with student debt has almost tripled from eight percent in 1989 to 21 in 2019 fact number four among households that took out student loans the average amount of such debt owed increased nearly four-fold from 1989 to 2019 even after adjusting for inflation fact number five the average borrowing levels for graduate students has grown significantly over the past couple of decades between the 1995 96 and 2015-16 academic years the average annual loan for graduate students grew from ten thousand one hundred thirty dollars to eighteen thousand two hundred ten dollars fact number six about ninety two percent of all outstanding student debt is owed to the federal government with private financial institutions lending the remaining eight percent fact number seven on average women own nearly three thousand dollars or ten percent more student debt than men black borrowers owe over thirteen thousand dollars or nearly fifty percent more than white borrowers fact number eight primarily due to higher average debt levels as well as lower earning and higher employment outcomes the default rate is highest for borrowers who attend for-profit colleges compared to non-profit and public schools fact number nine in the past few years the number of such loans increased nearly 50 percent rising from 178 billion dollars in 2016 to 263 billion dollars in early 2020 however this was before the pandemic and finally fact number 10 research from the federal reserve has shown that due to high student loan totals from 2005 to 2014 the home ownership rate for all households dropped by four percentage points while the rate for households led by someone aged 25 to 34 dropped by nearly nine percentage points before we get into the math let me just say if you have private student loans pay them off now don't wait pay them off as soon as humanly possible but for federal student loans what about the math how does it break down if you were to pay off your student loans early versus if you were to invest the rest after your monthly minimum payment the average federal student loan balance in the united states is thirty seven thousand fourteen dollars the average interest rate for those loans sits at four point one two percent though borrowers can change their plan structure the standard federal loan repayment plan is 10 years over those 10 years with a minimum monthly payment of 377 dollars your total amount paid would come out to forty five thousand two hundred twenty four dollars with eight thousand two hundred ten dollars of that being interest ahead of crude but i get it our basic human emotions make our gut twist over the fact that we have lost eight thousand two hundred ten dollars over those ten years while being forced to lose 377 dollars a month out of our bank account just to meet minimum monthly payments but let's keep breaking down the math if you wanted to pay these loans off twice as fast in five years by paying six hundred eighty four dollars a month your total amount paid would come out to forty one thousand twenty one dollars with four thousand seven dollars that being interest that had accrued now you can take that full 684 dollars a month that you are paying and put that towards an s p 500 index fund over the next five years your investment account would total 51 313 with 9589 of that being compound interest that is accrued on your behalf but if we only paid the minimum monthly payment of 377 dollars over those 10 years and instead invested the additional 307 in an s p 500 index fund by the end of the same 10 years we will have lost eight thousand two hundred ten dollars in interest instead of four thousand seven dollars but our investment account would be a total of fifty nine thousand five hundred eighty three dollars with twenty two thousand four hundred thirty six dollars of that being compound interest that has accrued on our behalf this means we would have actually profited a total of four thousand sixty seven dollars if we instead invested the additional three hundred seven dollars a month instead of paying off our student loans twice as quickly and yes this takes into account the interest that accrued on both the investment account and student loans in both examples so that's the basic mathematical breakdown using federal student loan averages from across the united states but instead of telling other people what they should do what did i do with my own student loans in the fall of 2018 when i moved down to austin texas for a great tech job i had forty thousand dollars in federal student loans and ten thousand dollars in private student loans from our girl sally may gotta love her i got a roommate and split a cheap for austin apartment to save as much money as i could i put everything i made that didn't go to essentials towards my private student loans i paid those off within a few months and felt a great sense of freedom but now what did i do about those pesky forty thousand dollars in federal student loans well the interest rate was sitting near that average of four point one two percent and i followed the same advice i gave before i continued to pay my minimum monthly payment and saved as much as i possibly could so i could instead purchase a primary residence here in austin after just a year and a half after that i then continue to save and put 20 percent down on two rental properties over an eight month period now those two rental properties have a peer monthly cash flow that more than covers my minimum monthly student loan payments when and if we ever have to pay them again now this is much more of a complex issue than one short youtube video can go into there's the fact that student loans disproportionately affect people of color in low-income communities there's the fact that honestly today some degrees are not worth the cost of investment what about certifications trade school or starting a small business again it's much more complex than these one sentence remarks that being said i broke down the math for the average federal student loan borrower and gave my own take on my own student loans to me the facts are pretty clear though human emotions might say otherwise the math suggests that if your interest rate is 5 or lower it makes more sense to invest the extra money than to pay off your student loans early let me know what you think in the comments below subscribe and stick around for more thanks

Channel: Caleb Hammer

Views: 25,042

Keywords: investopads, bigger pockets, noelle randall, lili thompson, kevin ward, biggerpockets, the rich dad channel, dave ramsey, crypto, day trading, stock trading, biaheza, ryan pineda, how to start in real estate, financial education, my financial friend, elena taber, john olfert, the plain bagel, meet kevin, graham stephan, how to invest in real estate, rental property, investment property, Mark Tilbury, shorts, personal finance, student loans, sallie mae, student debt, debt

Id: xcqzcjJp8kI

Length: 8min 31sec (511 seconds)

Published: Mon Jul 04 2022