Thursday, 11 December 2014

Student loan | Want to get rich? Don't pay off your student loans! | FOX6Now.com

Student loan | Want to get rich? Don't pay off your student loans! | FOX6Now.com

Want to get rich? Don't pay off your student loans! | FOX6Now.com

Posted: 11 Dec 2014 05:12 PM PST

NEW YORK (CNNMoney) — When I graduated from Drexel University in 2009 with a degree in engineering, I was 23 and had $200 in my bank account.

In other words, I was like most American college students: Poor and in debt.

I was subletting a small studio apartment in Philadelphia with two other engineers. Our combined student loan debt was well over a quarter of a million dollars. Out of the three of us, I came out by far the least scathed — I had about $55,000 in student loans. This was after receiving grants, scholarships, and help from my parents every year.

The loan burden: My mother was overly ambitious in helping me and put a lot of my tuition payments on her credit card; as a result, she ended up claiming bankruptcy my senior year.

My roommates each had over $100,000 to repay. One of them currently waits tables on weekends on top of having a full-time engineering job. He's been doing it since we graduated in an admirable effort to pay down his student loan debt.

When I started my career, my monthly student loan payments came to $460. My entry-level engineering job paid $48,000 a year. I was better off than most. My payments were inconvenient but still manageable.

Paying down debt: Aside from moving out of that studio and into a small two-bedroom apartment, I maintained the same modest lifestyle I had while I was a student. A lot of my friends were still struggling to find jobs, so there wasn't much social pressure on me to get a new car, a nice apartment or eat out at fancy restaurants.

I began attacking my student loans by making double and triple payments. Like a lot of other recent graduates, I was conditioned to fear debt, and I made a point to get rid of it as soon as possible.

Coming out of school just after the financial crisis had a big impact on me. I wanted to know what had just happened and why my friends weren't getting the jobs they deserved, so I started reading a lot about the crisis and about economics in general.

One important concept that I came across was Opportunity Cost — the notion of quantifying what you give up when you chose one option over another. I asked myself: Why am I rushing to pay off loans with 3% to 6% interest rates when the S&P has historically returned 11%?

Game changer: I changed my entire philosophy on debt. I started making minimum payments on my student loans, picked up a "Stock Investing for Dummies" book, and put whatever extra money I made into the stock market.

I was a novice investor, but I bought at a time when a lot of other people were discouraged from investing in 2009 and 2010. Consequently, I was able to buy stocks at bargain prices.

When I turned 26, I noticed something astonishing My student loan debt and the money in my investment account had converged to the same amount — $35,000. It was a really good feeling knowing that I could wipe away my entire student loan debt with just a few mouse clicks, but I opted to continue making minimum payments.

By paying the minimum, it would take me eight years to pay off all my loans. Here are the options I thought through:

Option 1 — Pay off loans entirely

I could pay off the $35,000 immediately with the money I had made by age 26. I could then put at least $460 a month for eight more years into an investment account.

After eight years, I would have $63,000 (assuming an annual return of 10%).

Option 2 — Continue minimum payments

The alternative was for me to continue making the $460 a month payment and keep the $35,000 I had accumulated thus far invested in the stock market.

After eight years, I would have $75,000 (assuming an annual return of 10%).

Sure, that is simplifying it a bit. Obviously, the stock market doesn't return 10% every year on the dot. These numbers also don't take taxes into account. Student loan interest is tax-deductible up to $2,500, and capital gains is 0% for anyone who taxed at the 10% to 15% rate.

The options will be slightly different for everyone. Depending on the interest rate and life of the loan, reducing debt might be the best option.

But for many of us who have grown up in modest households, we are taught to pay off debt quickly. It's not a bad lesson. But if you want to get rich, you might be better off making the minimum payment on your student loan and investing the rest.

Today I am well on my way to paying down my student debt, but I also have tens of thousands in stock market gains.

I'm glad I did the math.

Mohammad Majd works at an engineering firm in Philadelphia. He wrote this piece in response to a CNNMoney story "How I paid off by student loans by 26."

Graduates offer different ways to get rich quickly pay off your student ...

Posted: 11 Dec 2014 02:30 PM PST

NEW YORK (CNNMoney) – When Mohammad Majd graduated from Drexel University in 2009, he had $200 in his bank account and thousands in student loan debt.

In all, he had $55,000 in student loan debt and was making the minimum payment of $460 a month.

"I began attacking my student loans by making double and triple payments. Like a lot of other recent graduates, I was conditioned to fear debt and I made a point to get rid of it as soon as possible," he wrote in an op-ed piece for CNN.

He soon began asking himself why he was breaking his back to pay off a loan with a 3 to 6 percent interest rate.

"I changed my entire philosophy on debt. I started making minimum payments on my student loans, picked up a "Stock Investing for Dummies" book, and put whatever extra money I made into the stock market," he said.

When he turned 26, he had earned $35,000 in his investment account, which was the same amount he owed.

He says he could either pay off the loans entirely and put the $460 he would be paying into the stock market, or continue making the minimum payments.

Majd says he will continue to make the minimum payment and hopes to have nearly $75,000 in savings within the next couple of years.

However, using the stock market is a risky tool.

If you aren't sure exactly how to make money using stocks, ask for professional help.

Also, don't forget about taxes.

You may owe the government money on the cash that you earn in the stock market.

Tracy Bindel says she took a completely different approach to paying off her loans.

Earlier this year, she had $13,000 left to pay and felt like she would never be able to pay it off.

After getting a decent job, she began putting every penny she saved into paying off the loan.

She cut back on purchasing furniture, shopped at thrift stores and walked wherever she could.

By the end of the year, she made her final loan payment.

Austin Netzley says he was in over his head after graduating from college with $81,000 in debt.

After being fortunate to land a good job, he says he made a conscious decision to be debt-free and used a few easy steps to pay off those loans.

He says he stopped getting into additional debt by sticking with his old car, he learned all about the loans he owed and looked for debt-relief options, like loan-forgiveness programs.

Netzley says he paid as much as he could on the higher-interest rate loans first.

He also started investing in the stock market, but warns it can hurt you in the end if you are not careful.

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Thursday, 11 December 2014