Monday, August 15, 2016

Get a Headstart on Your Investments

As a young individual applying for college, you may not realize that you are actually looking to make your first big investment of your life.  Higher education is often viewed as a financial investment in your future.  It makes sense.  Invest money in a two or four year program for a degree.  This degree leads to opportunities of greater future earning potential.  It is simple; invest money to make money.

There was a growing trend that called for everyone to get a college education which eventually increased competition in the labor market.  It became harder to get a job without a degree which only helped propel the trend.  Basically, everyone wanted a degree because everyone wanted a job and money. 

With that being said, the rise in demand for college education brought on a rise in tuition and cost of attendance.  The escalation of college expenses increased the prominence of student loans.  Since the average college applicant could not cover the overall cost of attendance, student loans became a popular solution to funding college.

Long story short, outstanding student loan debt exceeds $1.3 trillion today, and it surpasses consumer credit debt as one of the top sources of debt in America.  This debt falls heavily on the millennial generation and college graduates within the past decade.  With financial hardship right off the bat, it became much harder for new, young employees to start other important investments which has greater repercussions than first thought. 

The moral of the story is that important investments are neglected by those with student debt.  Investments such as home ownership and retirement funds are extremely important for financial health down the road, and it is common for student loan borrowers to focus on student loan debt before moving on to other goals.  

Luckily, there are ways to limit the burden of student loans that lead to more financial flexibility in the future.  Some of these involve circumventing student loans entirely while others involve a change in approach to them.  Here are several ways to quickly cut away your student loan debt and pave the way to greater lifetime financial investments.

Find "Free Money"
When talking about "free money," you are talking about grants and scholarships.  These are opportunities to fund your college education without any repayment responsibilities, hence the term "free money." 

Scholarships are extremely popular.  They are offered to people for any and all reasons such as merit, heritage, financial need, or even individuality.  The best way to find which opportunities fit your criteria is to utilize online scholarship resources.  Sites such as these lay out information and deadlines for scholarships  which makes it easy to secure free funding for higher education.
Grants are similar to scholarships, but they are less diverse and not as abundant.  The federal government provides several grants (Federal Pell Grant, Federal Supplemental Educational Opportunity Grant, and more) to students of significant financial need, prospective teachers, and military veterans.

The benefits of a grant or scholarships are simple.  The need for a student loan lessens with multiple scholarships and grants, so there is a better chance of graduating debt-free.

Student Loan Refinancing
Many graduates find themselves with multiple student loans which is a recipe for disaster.  More than one loan means more than one interest payment which can exacerbate a loan uncontrollably.  There is a simple solution to mounting and multiple interest  payments: student loan refinancing.

Refinancing is a well-known tool when dealing with mortgages, and it is growing in prominence for student loans.  A private lender essentially refinances multiple loans (private or federal) by lumping them together and changing the repayment terms to benefit the borrower.

The end result is a loan with one interest rate and an altered repayment period.  Refinancing nearly always reduces amount spent on interest over the life of a loan.  Without the burden of student loans, a retirement fund can be started without causing as much financial stress.

Pick the Right Major
One interesting criticism of student loans involves choice of major.  Today, loans are given out without much consideration of the borrower's major which has been brought up with controversy.
Without naming any majors, a simple generic example suffices.  An overall loan of $120,000 for a four year degree is disbursed.  The borrower finished his or her education only to enter his or her field with an earning potential of $35,000 a year.  From the lender's perspective, this is a bad investment.  From the borrower's perspective, this is a tough debt situation.

The piece of advice here is to pick the right major.  Researching different professions and salaries can provide insight on different earning potentials. It is ideal to choose a career path that has the ability to sustain student loan payments on top of the cost of living.  This is generally good advice, but it is paramount for a healthy investment career.

Proactive Payments
There are a couple of ways to tackle student loan payments that greatly decrease the repayment period.  And they both involve tackling interest in a different way.  Student loan interest capitalizes each month which basically means each subsequent interest accrual is larger than its predecessor.
One of the first practices is starting interest payments while still in school.  This keeps interest from building excessively onto an original principal balance over the life of the loan.  The other method involves making monthly payments that are larger than the minimum requirement.  This practice limits the rate of interest accrual by cutting away at the principal balance.

By paying off interest early and making larger principal payments, the capitalization of student loan interest can be countered which saves money down the road.  Money saved down the road can be put towards other important investments.