Archive for November, 2008

There are so many great things that come with higher education that it is hard to know where to start. Of course, all those positives come with a price. For most of us, that price is known as student loans and those first shocking invoices after graduation.

Once you start repaying the loans, a question will quickly develop. Should you invest your extra money and pay the loans off in one fell swoop or are you better of throwing the extra money at the balance each month?

Of course, you may be wondering where exactly you are supposed to find this extra money. The truth is you have it, but do not realize it. Setting aside $100 a month adds up to $1,200 at the end of the year. The question is where to apply it and the interest rate of your student loans can be an indicator.

If you have student loans, a good percentage are government oriented. They tend to have low interest rates on them compared to private loans. This may tempt you to pay them down first. In truth, you might want to invest that money and pay them off later.

To figure out the best option, consider the difference between the cost and return. If you find an investment that pays 10 percent in dividends like Canadian oil stocks versus a 6 percent interest rate on your student loans, the investment options looks pretty good.

Admittedly, there are other issues to consider. One is whether taxes will change the balance. Capital gains taxes are 15 percent if held longer than a year. You also need to consider whether you will have the discipline to leave the money alone. Only you know.

Obviously, you also need to be comfortable with your decision. If you are unfamiliar with investing or unsure about it, then do not use the strategy. There is nothing wrong with paying off student loans directly. Do whatever will let you sleep at night.

If you prefer to work on the loan balances directly, how will you approach it? There is one strategy that works well. The first step in applying it is to break down your loans from one giant debt into smaller pieces you can financially and emotionally handle.

Your first step is to pick the smallest loan. After you make all your monthly payments, apply whatever extra cash you have to that small loan. Be disciplined. Since the loan is probably relatively small, you should be able to pay it off quickly, often in less than a year.

Once the loan is paid off, you will feel a sense of accomplishment. Yes, even though it is a relative small amount of your total debt. The point is to get positive feedback, which helps with your discipline. Now do the same with the next smallest loan.

Whatever your choice in this matter, your goal should be to pay down those loans as quickly as possible. The faster you go, the sooner you will be free of your student loan obligations. When you pay them off, your credit will also be golden and banks will lend you money hand over foot.