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.
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!
5 Hidden Risks in Retirement That Could Affect Your Financial Security
Being well-prepared for retirement is wonderful, but there is no fail-safe plan. Things can unravel due to many inherent post-retirement risks. Understanding those risks that lie ahead and how they can harm financial security is key to making critical adjustments in a retirement plan. Sometimes without those changes, the impact of unfavorable and unpredictable events can be far more severe.
“Once you have a retirement plan in place, it’s not set in stone,” says Clayton Alexander (www.retireteton.com), an investment adviser and founder of Teton Wealth Group. “
Alexander says retirees and those making retirement plans should be aware of these five risks:
Running outof money before they die is one of the primary concerns of most retirees. This worry is heightened by the fact that the average life expectancy has increased. “A pension or an annuity can lessen the risk, but carefully investigate anycompany where you’d place an annuity and be cautious of fees and interestrates,” Alexander says. “It’s best to tailor your plan to run to life expectancy plus five years.”
- Loss of income. “Make sure both you and your spouse are protected from the unexpected,” Alexander says. “Consider the financial impact of the loss of one spouse. Remember that your surviving spouse will only get the highest of your two Social Security checks. A spouse’s death can bring additional financial burdens, including lingering medical bills and debts. Life insurance and estate planning are important vehicles to protect survivors.”
- Health care costs. Longer life expectancy could lead to high costs in a long-term care facility. “It’s estimated that approximately 50% of people over 65 will need long-term care,” Alexander says. “Do not overspend on policies that may be subject to drastic premium increases. And surprising to some, Medicare is not free — your premiums for coverage are usually deducted from your Social Security check. Medicare doesn’t cover dental, hearing or vision, is subject to deductibles, and doesn’t cover long-term care. Long-term care insurance is advisable.”
- Negative return risk. “A 50% gain does not allow a portfolio to recover from a 50% loss,” Alexander says. “In fact, a 100% gain is required to restore a 50% loss. The ‘buy and hold’ strategy that works when you are young — where
you waitfor the markets to come back up after a downturn — does not apply inretirement as we saw in 2008,when many people’s retirements were wipedout. Common stocks have substantially out-performed other investments over time and thus are usually recommended for retirees as part of a balanced asset allocation strategy, but the rate of return you earn can be significantly lower than the long-term trends.”
- Inflation risk. “
You shouldplan on prices for food, goods andservices getting higher duringretirement, reducing your buying power incrementally as you are livingon a fixed income,” Alexander says. “Your retirement plan has to factorthat in. Ways retirees can curb the effects of inflation include annuity products with a cost-of-living adjustment feature and investing in equities, a home, and other assets.”
“Understanding what the potential post-retirement risks are and considering them in the retirement planning stage,” Alexander says, “can help to ensure that they are mitigated and properly managed.”
Are Americans Undervaluing Paid Time off + Quick Trip Tips
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 essential 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 in lost benefits! So, take your vacations and follow the tips below to not break the bank while taking time off:
- 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.
- 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.
- 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 finds interesting places to eat that way you can make the journey part of the vacation.
- 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.
Top Ten Freshman Money Myths
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…)