Tags: Paying | Off | Student | Debt | Wealth | Generating | Decision

Paying Off Student Debt: A Million-Dollar, Wealth Generating Decision

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By    |   Tuesday, 09 May 2017 11:10 AM

For 7 of 10 students completing undergraduate school (68%), the Institute for College Access and Success says that they average more than $30,000 of education debt. This can be much higher for others, especially if they go on to graduate school. It is not uncommon for physicians and graduate students to have borrowed more than $200,000 for their education.

Most start to pay off this debt once a job is landed. Many try to pay this off as soon as possible because they are counseled “debt is bad” or lenders encourage you to pay back sooner. If you are one of these, you may be sentencing yourself to working longer and harder in life than you have to.

Say you have $60,000 in student debt for you (or foryour child if you’re a parent reading this). Federal student loan rates are about 6.8% today. If you decided to pay off your loans over five years, this would result in a monthly payment of about $1,176 or $14,112.. However, if you have a home you might be able to add this debt to your mortgage or if you have other loan options, you may be able to pay the loans off over a much longer period of time, creating the opportunity for producing more monthly cash flow. Paying these off loans over the life of a 15 year mortgage at 4% would result in a $442 monthly payment or $732 less per month, $8,784/year. A 30 year mortgage at 4% would result in a monthly payment of about $285 per month, cash flow savings of $891/month or $10,692/year.

So you might be asking yourself, while I understand getting a lower interest rate saves me money, why wouldn’t I still pay off the loans quicker? The answer: Taxes and the principle of compounding may grow more wealth for you.

Most do not save the maximums in their 401k at work. By paying off student debt smarter, you now have either $8,784/year or $10,692/year in cash flow savings (depending if you go the 15 year or 30 year route). If you save the new found cash flow in your 401k, this will lower your income taxes. If you also save the tax savings generated, you can now save $14,640/year or $17,820/year (assuming a federal and state tax rate of 40%).

Savings $14,640/year for 15 years, assuming a 6% annual rate of return, creates wealth of totals about $356,572. If you stopped saving this amount at this point but let the balance of $356,572 grow for another 15 years at 6%, it will grow to some $875,061. If you save $17,820 over 30 years at 6%, you save almost $1.5 million. Just think, if you need $3 million to retire, this might pay almost 30% to 50% of what you need for that goal! Just think of the wealth total if you had double or triple this debt amount and the resultant cash flow savings!

Maybe you are saying, “Hey, I can just pay off the loans and save all of the loan payments after just five years”. You can, but you will find that you will be behind the wealth totals above. This is due to saving earlier and taking advantage of compounding. Besides, do you really save a loan amount when it is finished? That car loan you just completed. Did you add this to your monthly savings? Not likely. These payments go into a big black hole called “life”.

Does this work for everyone? You do have to be disciplined and save the monthly amount, so possibly not. If you can, though, you might just achieve your financial goals sooner and work less years! And just ponder: You saved this money without having to work an hour or day longer!

Al Zdenek is the president, CEO, and founder of Princeton-based Traust Sollus Wealth Management (http://www.tswealth.com/). He is a CPA, financial specialist, and author of the new book "Master Your Cash Flow: The Key to Grow and Retain Wealth" which gives you straightforward and valuable information you can use in everyday financial decisions to help make the correct financial choice for you.

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You do have to be disciplined and save the monthly amount, so possibly not. If you can, though, you might just achieve your financial goals sooner and work less years! And just ponder: You saved this money without having to work an hour or day longer!
Paying, Off, Student, Debt, Wealth, Generating, Decision
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2017-10-09
Tuesday, 09 May 2017 11:10 AM
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