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Student loans: Set it and forget it?

Posted on Written by Kostas 5 Comments

Graduating with a boat load of student loan debt can really be depressing. When you finally see that final number which you’ve been ignoring for years, it can really be shocking. Graduate and professional students like myself can easily come out of school with 6 digits of debt. The student loan companies will put you in something ridiculous sounding like a 15 or 20 year re-payment plan. If you get a good job coming out of school, it can be tempting to put the student loans on the back-burner and focus on enjoying your money because you feel you “deserve” to. Nothing wrong with having some fun, but there is something wrong with paying minimum payments on a debt for 20 years. This is a pretty bad financial move for most people, because you should hardly ever stay in debt longer than you need to be.

We often think of our debt from solely our point of view. But it can make a lot more sense if we think of it from the banks point of view as well. A student loan debt is a contract between us and the bank. The bank gave us money to go to school and educate ourselves (how nice of them.) They want us to pay this money back when we’re done with school. They charge interest to cover themselves in case we don’t decide to make all the payments and to make a LITTLE money themselves. They would like nothing more than for us to quietly make our minimum payments while they get all of their interest. What they don’t want is for us to accelerate our payments and save ourselves a lot of money and time. Which is why this is EXACTLY what we should be doing.

A student loan is an investment in yourself, and the key factor every investor looks for is the return on investment (ROI). The ROI measures the efficiency of an investment, and investment cost is one aspect of that efficiency. By opting to pay your student loans over a long period of time and end up paying the maximum amount of interest, you are decreasing the ROI in yourself. Paying whatever extra you can on your highest interest student loan will effectively increase your ROI and make your education worth more. Everyone wants a great investment, and paying off your student loans early will help ensure your education becomes a great investment in yourself.

The other obvious side of paying your loans off quickly is that it frees up money, money you can use for whatever you like. Now I prefer to keep the avalanche going by using that newly freed up money to attack your next student loan, but if you have an unexpected expense or a great investment you want to get in on, you can use your money on that. The money isn’t being used to generate interest for the bank anymore, and that’s a plus in itself. That new money can almost be looked at as a bonus, since you were hopefully able to live without it before. Creating income is the best thing we can do to become financially free, and paying off student loans is a great way to do just that.

There can be some arguments made against paying student loans off early such as not getting the student loan interest tax deduction or opting to contribute to retirement plans instead. In most situations, not deciding to pay off student loans can be a pretty short sighted decision. Paying off student loans early provides a GUARANTEED rate of return, because you are definitely going to be paying less interest than if you went with just minimum payments. A tax deduction on interest is nice, but pales in comparison to the benefit of not paying ANY interest. I would recommend contributing something to a retirement account as you have compound interest working on your side, especially up to an employer match if possible. But again, rates of return will vary with your retirement account, while paying off student loans is guaranteed to give you a positive return.

Obviously, I’m not a big fan of just making minimum payments on your student loans. In a way, you are selling yourself short by making your education worth less than it can be. It’s also preventing you from freeing up your money which can be used however you please. So if you can afford to throw some extra money at your loans, do it. Your future self will greatly thank you.

Filed Under: Student Loans

Down with student loan debt!

Posted on Written by Kostas 8 Comments

This article appeared in a slightly different version as a guest post on frugaling.org, another great website for financial info.

I’m an optometrist and I love my job. Like many professional jobs in the medical field it has a good starting income and great potential, especially if you become a successful business owner. As much as I love my job, there is one thing I hate about the process of becoming an eye doctor: student loan debt. And we graduated with a lot of it. I graduated with around $150,000 in debt myself. I have colleagues who are in well over $200,000 in debt. The story is similar for graduates of medical, dental, pharmacy and law schools. According to a report by the American Association of Medical Colleges, the median level of debt for graduates in 2013 was $175,000!

The main problem is of course continuously rising tuition prices which probably won’t be going down any time soon because there is too much money to be made for the banks. Just to get a glimpse on the current status of medical school tuition, here is a US News report on the 10 most expensive medical schools. Looking at these numbers makes it easy to see how students can routinely graduate with well over $200,000 in debt! Rising tuition rates are a highly charged political issue which probably won’t be resolved anytime soon. But there is something we can control, and that is how fast and how strong we decide to attack our debt. Most lenders put you in a 25 year payoff plan. This is a ludicrously long time and will lead to hundreds of thousands of dollars in interest that can certainly be avoided. Here are five quick and relatively painless ways to cut your expenses. These methods have personally helped me to attack my student loan debt and greatly reduce my lifetime interest:

1. Ditch the gym membership: Like most people, I thought getting a gym membership was the responsible and healthy thing to do. With the rows and rows of treadmills and dumbbells, getting in shape was an inevitability. But after a while I found myself not enjoying the workouts and then making up any and all excuses not to go to the gym. There was the whole process of getting ready, driving to the gym, finding a parking spot and finding the least sweaty machine to use. This was going on for a few months until I decided to sit down and evaluate my gym usage. I realized the workout I enjoyed doing at the gym the most was playing basketball. I cancelled the membership and focused on playing outdoor basketball and running outside, two almost free activities that I actually have fun doing. Savings: $80/month

2. Look at your wireless plan: I’ve been with Verizon Wireless for a while now and have been happy with their service. Calls are rarely dropped and their customer service is pretty good (as good as you’re going to get with a cell phone company anyway). When they changed to their limited data program, I was defaulted into the 4 GB data tier, mainly because it didn’t really change my wireless bill. After a few months I decided to check how much data we were using, and it was well under half a GB! I get a WiFi connection both at home and work, so I’m not really using cellular data all too much. I switched us into the lowest 1GB tier plan and haven’t felt a data pinch even once. Easy savings. It can pay to check the current status of your wireless plan. Savings: $30/month

3. Run that car into the ground: For most Americans getting a new car every 3-5 years is normal. It is almost a rite of passage. It is also one of the worst financial decisions you can make. A car is NOT an investment, yet people are content with paying tens of thousands of dollars or getting a high interest loan on a product that will give you a guaranteed negative return. Yes, cars are definitely needed to get you to and from work. But there are other alternatives such as public transportation or not buying an expensive new car.

I currently drive a Chevy Cobalt, which is a relatively fuel efficient car. It is paid for and has not given me any major problems. I get regular maintenance in it according to the recommendations in the manual. Luckily, my commute to work is less than 10 minutes each way so I don’t forsee anything MAJOR happening to the car as long as I get regular maintenance. And I plan on using it until I can’t drive it anymore. This is because I don’t want another car that can do the same thing my car does but has a monthly payment. I don’t want higher insurance premiums. And I don’t want to go through the hassle of getting a new car. These are reasons enough for me to keep my current vehicle and avoid future monthly payments for as long as I can. Savings: At least $200/month

4. Shop around for auto insurance: The only thing good about auto insurance companies is their commercials. Most of the auto insurance companies are pretty much the same when it comes to customer service. If you look at reviews online, pretty much all the companies have as many decent reviews as bad ones. Sure some people have had terrible experiences with one company or another, but as a whole customer service is pretty much the same across he board. This means that price is the overriding factor in choosing auto insurance, and in my experience it really is worth it to shop around.

I was with Nationwide for around 4 years. I originally signed up with them because a family friend worked for them (probably my first mistake). I pretty much accepted their rate (a little over $200/month) and was relatively happy with their service (except for the fact they charged a fee to pay by credit card). In any case, I didn’t think much about switching until a few months ago, when I decided to get a quote from GEICO. It was $120 less per month than my current rate. That’s over 50%! It seemed too good to be true so I got quotes with other companies and was consistently getting much lower rates than my current one. And most of the quotes were for even more coverage than I was getting at the time. I knew I needed to switch and after all the numbers were crunched, I ended up saving a little over $100/month. Plus it’s cool to have that little gecko on my side now. Savings: $100/month

5. Get a credit card that pays: Optimizing credit card use is a mini-obsession of mine. I enjoy finding ways of getting credit card rewards on stuff I already spend my money on. Which is why I get flabbergasted when I see people paying for stuff with cash when a perfectly good rewards card would give them some money back. The most rudimentary rewards cards give 1% cash back, which is $10 back on $1000 worth of purchases. Not amazing but better than nothing. The key is finding cards with higher rates for certain categories like groceries or gas stations and cards with sign up bonuses for certain levels of spending. This can easily get you a few $100 a month here and there. Plus it’s nice to get something from the big banks. You do need to be careful not to increase your spending just to get some rewards, as this would wipe out any benefit from the card. Savings: $10-$100/month

These 5 easy savings tips produced over $400 in monthly savings. Applying that directly to your highest interest rate student loan payment can make a world of difference. For example, a student loan balance of $30,000 with a 6% interest rate and $200 monthly payment would take 23 years to pay off with just the minimum payment. Applying that $400 on top of the minimum payment, the loan would now take just 5 years to pay off! (Calculations done on unbury.me) Truly astounding numbers and proof that making extra payments can drastically reduce the length of the loan and interest paid.

The other, and potentially more lucrative, side of debt repayment is making more money. You can only save a finite amount of money but earning potential can be endless. Making money can be more difficult and usually requires more work upfront, but the rewards can be well worth it. To go along with the theme of this post, however, here are a few painless ways to make more money that have worked for me and helped me pay down my debt faster:

-Work more: This is kind of a no-brainer but it is an option that is overlooked a lot of times. It really depends on the type of work you do and how much you get paid, but working just a few more hours a week can really help boost your monthly income. Some people recommend getting a second job to make more money, but that can have more costs associated with it such as a new commute, wardrobe etc. This should only be a temporary solution though as maintaining a good work-life balance is essential.

-Sell stuff: This can be a great way to make some extra money as most people have a bunch of things lying around the house that can fetch some money. Old cell phones, video games, TV’s and furniture can make some decent money when sold on eBay or Craigslist. It takes some time to find what sells and what doesn’t, but it can be some nice bonus income once done right. De-cluttering your living space is a nice side effect to this option.

-Use your current skills: Making more money usually involves gaining new skills. But there is money to be had using the skills you already have. Have you always been really good at math or any other school subject? Find out if you can join a tutoring service or advertise on your own. Do you enjoy writing about sports or any other particular subject? Scour Craigslist for opportunities to write articles or reviews. All you have to do is think about what you’re really good at and find a way to make some money off of it. This can take some creativity but opportunities can range from consulting to tutoring a friends son.

Combining pain free ways to save and make money and applying that extra money to student loans can make all the difference in the world. It’s also important to know that getting rid of loans frees up even more money to attack more loans (my preferred choice) or for anything else you want to do.

Please leave a comment and share your saving and money making tips that can help pay off debt!

Filed Under: Money Savers, Student Loans

Snowball vs Avalanche: Is it even a question?

Posted on Written by Kostas 10 Comments

We have so many ways to get into debt nowadays. Credit cards, mortgages, student loans, car loans and, God forbid, payday loans. With so many ways to get into debt it’s important to know the quickest ways out of debt. And it’s not by calling one of those debt “reconciliation” services. The first step to pay off debt is to not add to it. Cut up the credit cards and don’t take any more loans. In a debt emergency such as large credit card debts, you really have to go into crisis mode and cut out whatever debt that you can and put whatever resources available towards paying off that debt. The next step is to stay current on all of your debts to avoid paying any late fees. This is done by simply making the minimum payment on all of your debts.

We of course can’t stop with just minimum payments because this will keep you in debt for a long long time due to interest. The next best step after making minimum payments is to gather up all the money you can and attack the debt with the highest interest rate. Or is it the debt with the lowest balance? This is where some financial gurus slightly differ. Some advocate attacking the debt with the highest interest rate first, known as the Avalanche method. Others, most notably a “guru” by the name of Dave Ramsey, advocate paying off the debt with the lowest balance first, dubbed the Snowball method. While everybody’s situation is a little different, the Avalanche method is almost always the way to go. And the numbers prove it.

Before we go into the numbers, it is worth it to know WHY someone would opt to use the snowball method to pay off their debt. According to Ramsey’s website, “You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.” This is drawing on the idea that some people need to see quick results in their debt reduction in order to gain some momentum and keep attacking their debt. Continuously attacking the lowest balance debt will produce “wins” that keep you wanting to attack your debt. If this method is enough to get someone into debt destroying mode, then there is some value in it as it is much better than not paying your debt at all. However, this should only be a temporary measure because using the Avalanche method instead will result in less interest paid over time. And there is a handy little calculator to prove just that.

Unbury.me is a great calculator that allows you to enter your loan’s balance, interest rate and minimum payment. You then enter your desired monthly payment on top of that and you can see the results using the Avalanche or Snowball method. I used the following hypothetical numbers:

-Credit card: $8000, $80 minimum, 15% interest

-Car Loan: $5000, $50 minimum, 8% interest

-Student loan: $10000, $100 minimum, 7% interest

First off, I was curious to see how long it would take to pay off these loans with just the minimum payment only. The results said the loans would be paid off by January 2047 with almost $69,000 paid in interest! This shows the danger of not attacking your debt at all. In any case, I entered a $200 additional monthly payment on top of the minimum payment. With the Snowball method, the loans would be paid off by August 2019 with $7546.01 in interest paid. MUCH better than not paying any extra in principal. With the Avalanche method, the loans would be paid off in May 2019 with $6273.93 in interest. That’s almost $1300 less in interest! I don’t know about you, but that seems like a big enough win to me to keep paying off debt. The Avalanche method wins in every situation.

Using the unbury.me calculator can be a very enlightening and sometimes eye opening experience. Seeing exactly what month your debt will be paid off is pretty empowering, especially if you’re saddled with many student loans like most broke professionals. And seeing how much in interest you will save using the Avalanche method over the Snowball method is very motivating as well. It can be just the swift kick in the rear you need to start obliterating your debt.

Filed Under: Financial know how, Student Loans

What is a Doctor Loan?

Posted on Written by Kostas 11 Comments

Anyone who has ever looked into securing a mortgage knows there are many different types of loans out there. Most people know about your typical 30 or 15 year home loan with a fixed interest rate and a 20% down payment. There are variable interest rate loans which potentially start with a low interest rate but can change after a designated amount of time, usually 3, 5 or 10 years. There are loans that are longer than 30 years or shorter than 15 years. You can also get loans for less than the ideal 20% down payment, but you’ll have to pay Private Mortgage Insurance. There are also loans out there for certain professionals, such as members of the military. There is also one such loan that is not talked about frequently, and that is the Doctor Loan.

The Doctor Loan, also known as a Physician Loan, is a special loan available to MD’s only. There are also similar loans available to other professionals such as optometrists, lawyers, dentists and pharmacists. They are a little harder to find but they have similar characteristics to a Physician Loan. Not many banks offer Physician Loans. Some banks like Bank of America offered them at one point and then stopped. The only bank I’ve seen that has consistently offered Physician Loans is SunTrust. The main advantages of a Physician Loan over a traditional mortgage are:

-Very low down payment requirement. Some loans even allow no down payment (This can be an obvious disadvantage if you’re not careful).

-Don’t factor student loans into credit worthiness. This is huge because doctors can easily come out of school with a student loan balance in the six digits. This can make it troublesome to get approved for a traditional mortgage even though the doctor would easily be able to afford the house.

-No private mortgage insurance. Ever. This is probably the biggest benefit. Most mortgages require PMI payments until you achieve around 20% equity in the property. This is money that goes straight from your pocket to the lender. It is not even tax deductible and it can be hundreds of dollars per month. Not having to pay PMI is a huge advantage.

The principle behind a bank offering physician loans is to obviously make more money and establish a relationship with individuals who make a high, stable income. Because physicians usually have steady high paying jobs, the risk of them not making their payments is pretty low compared to the rest of the population. This is why the bank is willing to offer a no down payment loan with no PMI and overlook student loans. This sounds like a pretty good deal to a fresh out of residency doctor, but they still need to be careful not to buy more house than they can afford.

There are some restrictions on who can qualify for this loan. Most doctor loans I’ve seen are only for those docs who have graduated in the past 10 years. This takes most established older docs out of the picture. Also, these loans just aren’t available in certain states. There is also obviously more documentation needed than a traditional home loan.

A Doctor Loan is a nice financial tool for those who can qualify. But just like any tool, it needs to be used for the right reason or you can risk really hurting yourself financially. It is a good tool for doctors coming out of school who are having trouble qualifying for a mortgage because of high student loan balances. Not having to pay PMI is a nice perk as well. It’s good to know that there are special loan programs out there that actually have pretty good terms for those who can qualify.

Filed Under: Financial know how, Student Loans

Should I invest with student loan debt?

Posted on Written by Kostas 2 Comments

After graduating college or professional school, there are many things on a person’s mind. When can I start working? How much will my starting pay be? My student loan debt is how much??? Investing is usually the furthest thing from a graduates mind. Yet this could be a mistake as recent graduates have the most powerful investing tool on their side: time.

Time spent investing is one of the biggest contributors to investing successfully. Compounding interest is your friend here, and the more time you give it to work, the more it will do for you. This article at get Rich Slowly gives a nice visual aid in this point. The bottom line is that waiting even 5 years before starting to invest can greatly effect your nest egg. Even small contributions like $25 a month can be very helpful and provide you with a good point to start adding to as your financial situation improves.

Now that we know how important it is to invest early on, the questions becomes how to prioritize your investments versus your student loans. The simple answer is to just look at the interest rates and compare them to possible rates of return.

I’m an advocate of making extra payments to any student loans above 6% before increasing your initial investment amount. The reason I pick 6% is that paying off student loans early is a guaranteed return on investment. Paying off a loan early means you won’t have to pay that interest rate on that extra money you paid, effectively giving you a future 6% return on investment. Numbers vary depending on who you ask, but the historic return in any 25 year period of the stock market is around 7%, not counting taxes. I’d rather take a guaranteed 6% return from paying off a student loan rather than a possible 7% return from investing in the stock market.

Using this 6% rule of thumb, or whatever rule works best for you, can make it a lot easier to determine when to pay off student loans early and when to invest. The other advantage of paying off student loans early, especially if you’re close to eliminating one, is that it frees up more income for you. Now depending on your financial situation, and the 6% rule of thumb, you can decide if you want to use that extra money to pay off another student loan or to increase your investing account.

Deciding when to pay off student loans and when to invest can be a pretty personal decision with many factors involved. Leave a comment below and talk about your investing strategy while having student loan debt.

Filed Under: Investing, Student Loans

Top 5 things I would do with a million dollars

Posted on Written by Kostas Leave a Comment

Powerball/lottery fever has been going around lately. Recently a group of people won the $448 million Powerball jackpot. Good for them. I hope they use their money wisely and in a way that will benefit their families and communities for years to come. This got me thinking on what I would do with a big windfall. Getting $448 million would be nice of course but there would not be much thinking involved in how to spend it because that amount of money would erase all of the debt we have and leave us with more than we would know what to do with.

Dr. Evil can finally pay off those grad school loans.

So I thought about how to spend a large sum of money that would still require some planning. I also wanted to assume I would continue working and making the same salary I am now. I thought $1 million (after Uncle Sam’s bite of course) would be a good place to start, so here are the top 5 things I would spend it on:

Student loans. This is a no-brainer for me as my student loan payments currently total $1200 a month. Getting rid of these debts alone would be enough for me. One thing to consider would be paying off the higher interest loans only as I do have some loans around a low 2% interest rate. I could instead invest this money in an index fund and most likely make more than a 2% return. There is also the maximum $2500 tax deduction from paying student loan interest. But I’m leaning towards the huge psychological and income boost of getting rid of all the loans. This would cost me around $140,000 leaving $860,000 left to spend.
Siblings’ student loans. Took me a little while to decide on this one because I wouldn’t know what to do with my life after student loans! I decided to pay off my siblings’ student loans because having a family free of debt will help everybody and their loans aren’t anywhere near the value of mine. Around $100,000 or so between all 3 of them. And also I think this would be a much better gift than the inevitable hitting me up for cash requests. This would free up money for them for the rest of their lives! This would leave $760,000 to spend.
Charity. Now that the family house is in order, I would give a healthy amount towards charity. I’m not exactly sure which charity but the problems that are dear to my heart include people going hungry and people getting sick and dying because of poor living conditions. So it would likely be a good charity for one of these causes. I would also like to give back to my community in some way. I would spend around $100,000 for this, leaving $660,000 to spend
Invest. With over half a million left to use, I would then turn to investing. I currently have a Roth IRA with Vanguard and a 529 with the state of Maryland. I would focus on these since I’m already contributing up to the match in my company’s 401k. The Roth IRA would get most of the pie because of much lower expense ratios and superior investment choices. I would invest $300,000 in the Roth IRA and $100,000 in the 529, leaving $260,000 to spend.
Mortgage. I’m actually not too worried about getting rid of the mortgage completely since eliminating student loan debt will free up more than enough money. Also I don’t believe in tying up too much wealth in a house because townhomes (which is what I have) don’t generally appreciate as much as typical single family homes, and it would be a pretty illiquid place to keep the money. I would still like to build some equity though and have a nice down payment to use upon selling the house, so I would put $220,000 towards the mortgage, maybe using it to build some improvements on the house as well.

Wait I still have $40,000 left to spend? Guess my education wasn’t that great after all. Seriously though, I think it would definitely be a good idea when receiving a windfall to leave some money to spend on yourself. Always wanted to go on that African safari or European tour? Ever wanted to buy that luxury car and not have to worry about a monthly payment? This is what I’d use that remaining $40,000 for because sometimes you just need some money to spend on whatever you want. Personally I would use it for vacation or three since I’m not really into fancy cars.

Well now that my million is gone, I would say I’m in a very good financial position. Student loans paid off for me and family, healthy investment accounts, good amount of equity in the house and some fun vacations ahead. Not bad at all. What would you spend a million on? Please comment below and share the wealth!

Filed Under: Financial know how, Investing, Student Loans