Slaying The Student Loan Dragon

Slaying The Student Loan Dragon

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by Gabriel Gibson

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?

At this point in the article, you are probably smirking. Extra money. What extra money? The truth is you have it, but just do not recognize it. If you could set aside $5 a day, you would have $150 at the end of the month and $1,800 at the end of the year.

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Government backed student loans come with low interest rates. This means that you can pay an extra amount and do more damage to the loan balance. The question is whether you should. In many cases, you are better holding back, investing the money and then paying the loan off all at once. Here is why.

The key is to look at the gain you can get with a conservative investment strategy versus the rate you will pay on your loans. If you are paying 5.5 percent on your student loans, but can get 15 percent through dividend payments from a company like Pengrowth Energy, you are better off investing.

Now, the answer is really not as obvious as it seems. There are two factors to consider. First is your ability to show enough discipline to not touch the money being invested. The second is a tax issue. Capital gains are taxed at 15 percent, so you need to figure that in to the equation.

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For many people with student loans, the answer to this question really comes down to their personal attitude towards debt. Some prefer to save and assume they will be able to produce enough of a gain that they will come out ahead even after taxes. For others, knocking down the balance is the key.

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.

Divide the loans out from smallest to biggest. Now we are going to focus on the smallest one. Any extra cash you have each month, pay it towards that loan only. By focusing on just one loan, you should be able to pay it back very fast.

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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.

Invest or pay directly? The choice is a personal one. As long as you remained disciplined, either should get you where you want to go. As an added benefit, paid off student loans will crank your credit report score up dramatically.

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