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Time to Start Repaying Your Student Loan

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By Warren Taylor, BankMobile President 

College is over.  You have a job.  It is time to start paying off your student loans.  This blog post will not address all the various types of student loans (Federal, State, private sector, etc.) and their repayment terms – as that would be a very long blog!  This article is more about how to pay off your loans as quickly and as cheaply as possible.

Should You Consolidate?

First, you may want to explore loan consolidation.  This is where all your student loans are reviewed, with their different interest rates and repayment terms, and then paid off by consolidating them into just one new loan with one monthly payment.  For many, this is a good way to go.  Your overall interest rate may be reduced, thereby saving you money.  It helps that you have one payment to make each month, instead of five loan payments all with different due dates.  The only real danger to consolidating loans is that you may lose some benefits that some of your loans may have – like loan forgiveness, loan forbearance, etc.

Choosing the Best Loan Term for You

When choosing a loan term, picking the shortest repayment time in order to get the lowest interest rate may not make sense.  Your rate will be lower, true, but your required monthly payment will also be very high.  This high monthly payment may hurt your chances of getting other loans – like a mortgage because your “back end” ratio is too high (see my first blog on budgets for an explanation).  Picking the longest term may not be wise either.  True, your monthly payment will be low, but because you are taking so long to pay off the loan, you will pay the most in interest since the term is longer and your rate will be higher (typically the longer the repayment term, the higher the interest rate).  Just when you thought you were “getting” how this loan repayment term thing worked, I need to add another complication.  It’s based on rewards.  If a 10 year repayment term has a 5% rate, and a 15 year term has a 10% rate, it may be in your best interest to take advantage of the shorter loan term because your interest rate is cut in half.  We would be happy to help our BankMobile customers with this decision – just give us a call.

How to Repay Your Student Loan Off Faster

Let’s get to repaying your loan – and sharing some “tricks” on how to repay a loan faster.  The average college student graduates owing $27,000 in debt.  This is the amount of the loan in our example.  Most loan program terms range from 10 to 25 years – consolidated loans have some shorter terms as well.  Your monthly payment for a 10 year loan, at 7% interest, on $27,000 would be $313.49.  If you pay an extra $24.18 a month, you will shave a full year off your loan – paying it off in 9 years instead of 10!   Making this slightly higher monthly payment will save you over $1,150 during the life of the loan.  I use the iOS app “Loan Calculator – What If?” to calculate loan payments.

Using the same example above, I could get a 10 year loan @ 7% interest, or they offer me a 15 year loan at 7.5% interest.  I might be inclined to go with the 15 year offer at 7.5% interest.  Why?  Well, my mandatory monthly payment would drop from $313.49 to $250.29.  This lower payment might help keep me under my 36% back-end ratio, thereby allowing me to get a mortgage or other financing if needed.  Second, if I or my spouse got laid off, if we had an emergency repair, a health crisis, having a required loan payment of $250.29 would allow me to keep my loan current and take the extra money to pay for the emergency.  If you do take the longer term, and here is where you need this discipline, I would still recommend you pay the higher monthly payment of $337.67.  By paying this extra $87.38 per month, you would pay off the loan in 9 years and 4 months.

General Guidelines

So what is the right choice?  Without knowing your ratios, income, debt levels, and other factors, it is very hard to tell you what to do.  However, here are some general guidelines to follow:

1. I would probably suggest going with a fixed rate loan instead of a variable rate loan. Why?  Interest rates are at historic lows.  There’s a greater likelihood that rates will go up than come down.  So taking on a variable rate loan now will likely lead to higher interest rates, hence higher monthly payments, in the near future. On a fixed rate loan, your payments will not go up if interest rates go up.  Again, choosing the right loan depends on your income, debt, and discipline.

2. Whatever your required loan payment is, pay more. Think about it, in the example above, paying $24.18 more a month (that’s basically 80 cents a day), cuts a whole year off your loan term!  Imagine if you paid an extra $54.62 a month (that’s $1.80 a day), you would shave 2 years off your loan term – paying your student loan off in 8 years instead of 10 years.  Isn’t that worth not having one Starbucks coffee a day?  Trade in a cup of coffee per day, shave 2 years off your loan repayment!  Perhaps I’ll write another blog on easy ways to save $20 to $200 per month.

3. Always pay your debts on time – even paying them a day late or $1 short can hurt your credit rating. But, if you do want to pay off debt quicker than normal, start with paying the extra money on your highest rate loan.  This means you use extra money you have saved from not going to Starbucks anymore to pay off your credit cards first, student loans next, and your car loan will probably be your lowest interest rate loan.  It’s amazing what an extra $1 a day can do to reduce a loan balance!

Maintaining a low level of debt is key to creating a successful financial life for yourself.  Now, let’s shed the debt!

Digm Piece (Op-Ed)

Are Americans Undervaluing Paid Time Off + Quick Trip Tips

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It’s August, which for many Europeans means taking almost the entire month off. So why is it difficult for Americans to take even the little vacation time they receive? A recent piece in The Economist states workers in the U.S. are doing it all wrong by going on short holidays which can add even more stress or taking none. Instead, it’s important for employees to recharge their batteries. It’s also beneficial for companies to have a consistent holiday month during which junior employees can head to the beach and managers can take stock of things, says the report.

While many Americans may not receive paid time off, especially those that only work part-time, even those who receive it generally don’t take all of it. What we don’t realize is that not taking a vacation is like giving money back to your employer especially with companies that have a use it or lose it policy. Which should encourage employees to use their time but unfortunately it does not. According to recent polls conducted by Bankrate, nearly 2600 US adults say they plan to take a quarter of their vacation days while 4% are not planning to take any vacation time at all.

Time off is a valuable perk, to the tune of millions of dollars! Just to bring the point home in 2017 Americans gave up 212 million days off that amounts to $62.2 billion dollars in lost benefits! So, take your vacations and follow the tips below to not break the bank while taking time off:

  1. Take a Staycation – Stay local and vacation somewhere that is less than a day drive away, this helps save gas, mileage, and spending on lodging. Look for local attractions, vineyards, interesting museums and landmarks or even travel to your closest big city and be a tourist for a day. You would be amazed at how much you can discover and learn by staying local and all on the cheap! It’s a bonus if you have friends in the town your visiting they can serve as a tour guide and let you stay over for free if they have the room.
  2. Book Flights Off-Season – July 4th, Memorial Day and Labor Day seem like a great time to go on vacation, unfortunately, everyone is planning to take time off during those busy weekends and ticket prices are through the roof because of it. Book flights after major holidays and during the week you will generally find that they are cheaper than weekend flights
  3. Take a Road Trip – Road trips are fun and cheaper than taking a plane especially if you must rent a car when you get to your destination anyway. Plan cool stops along the way and find interesting places to eat that way you can make the journey part of the vacation.
  4. Plan to Eat In – Food adds up on vacation so pack food and making one or two meals in your hotel can keep you under budget.
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Digm Piece (Op-Ed)

Top Ten Freshman Money Myths

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Starting college is one of the most important and exciting times of your life. Now that you’re all “checked-in,” enjoy your college experience without worrying about where your next meal will come from by chasing away these common freshman money myths. (more…)

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Digm Piece (Op-Ed)

Do What You Love for Free – Here’s Why

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This is ParadigmMoney.Com, right? So, speaking about a paradigm shift should come as no surprise. In science and philosophy, a paradigm is a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitutes legitimate contributions to a field. When speaking about money, most believe it is something you work for and not something that works for you. In all truth, the one percenters understand this concept quite well. In order, to wake up and do what you love, you too must shift your thoughts when it comes to finances.

Doing what you love for free allows you to create freely. You can come up with disruptive, out of this world, never seen before creations that will rock this planet. Take Elon Musk from South Africa, founder of X.com which went on to become PayPal and sold to eBay for 1.5 billion dollars. Musk is also the CEO of SpaceX which designs, manufactures and launches advanced rockets and spacecraft. The company was founded to revolutionize space technology, with the ultimate goal of enabling people to live on other planets. You may say, of course, he can do this, he is a billionaire and co-founder of Tesla.

Not true. PayPal, Tesla, and SpaceX are all products of Musk doing what he loved. As a child, he was an avid reader and taught himself computer programming leading to the creation of X.com. He dropped out of college to start a company with his brother and here’s what he had to say about that PayPal deal… “My proceeds from the PayPal acquisition were $180 million. I put $100 million in SpaceX, $70m in Tesla, and $10m in Solar City. I had to borrow money for rent.” Elon Musk’s current net worth is estimated to be at about $13.3 billion. No bad at all.

The reality of the matter is the less you are attached to money the more money flows to you. Pay more attention to creating things that move the culture forward. Starting at doing what you love with ultimately position you for financial success and happiness.

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