I am in the financial field and I do agree with his friends. Debt Snowball has nothing to do with maximizing your money and your credit. The only way it is useful is for someone that must see results by having loans/credit card payments/etc. drop off completely. This isn't how one would go about savin the maximum amount of money. Sure, if the tax savings from the loans are minimal then that means you are also paying a minimal amount. Even if the loan is a 6.8%, the tax savings could drop the actual rate down below 6%. If a person feels they could get more than 6% elsewhere by investing in an IRA or real estate, then they would be better off just paying the minimum on the loans and putting the money to use elsewhere. If they don't, then the best way to maximize their money would be to, as others have said, pay the minimum on all of the loans except for the one with the highest interest rate. Once that one is paid off, put all of that money, as well as what you were previously paying, toward the remaining loan with the highest interest rate. Another possible option would be to look into consolidating. Reeko is right, student loans are known as good debt by creditors because this is debt going toward a good use or cause. These are installment loans, and help diversify your credit, and also help build credit history since the people that take them out are usually younger. Your credit score will rarely improve when you pay off student loans. This is because there is no more risk of debt to the lendors. Quite often, a persons credit score will drop after paying off student loans because they are the only installment loans the person is paying. Having more than 1 type of credit (installment & revolving) is beneficial, and if you're paying a minimum amount for it, then it may be worth. If you could actually be making more from investing the additional money and paying the minimum on the loans while having them there to help your credit, then why not? Usually the only reason is because people just can't stand the thought of having the debt there. Here's a good overview of how Student Loans impact your credit score. Space Ghost mentioned that you need to have enough interest to meet your standard deduction, and this is not the case when it comes to student loans. Student loan interest is a separate deduction. Yes, like agslai said, the tax savings are minimal, but that is just an added bonus. The real place to look is where else you could be investing the money and how much you could be earning (if you could invest in stocks, which have averaged ~10% over time, versus paying 6%, that's a 4% difference, and that doesn't even include all of the compounding that comes from that difference over time), and also how your credit is affected. -Fastest way to get rid of the loans - Pay off the highest interest rate first, pay the minimum on the rest and work your way down. -If you need to see results asap - Debt Snowball, pay the minimum on everything but the loan with the lowest balance and work your way up. -Maximize your money & credit - Decide how much you think you could earn investing the extra money, and what your Student Loan Interest deduction will be. If this is greater than the interest savings you would get by putting this money toward your student loans, then this is the route to take. Otherwise, one of the two previous routes would be in your best interest. Keep in mind, most companies like Sallie Mae have programs that allow you to lower your interest rates. Setting up automatic payments, making 24 or 48 consecutive on time payments, and a few other things will lower your interest rate. Also, like I said above, consolidation may be an option because that can lower your interest rate.
Excellent input. For what it's worth, my plan is to borrower money for a renovation property and to sell it for a profit. I work for a lender, so I'm just concerned with my DTI ratio being too high to qualify for financing.
With all due respect, I don't care what creditors call debt. A student loan is not actively generating you income. A degree, or very often, an incomplete degree does not guarantee a good job. What one does with their job after completing a degree is irrelevant to the type of debt. The fact remains that debt is there until its paid off, regardless. Secured debt is much much better to have. A house and a car can be sold off to pay off the debt. You can't sell off your degree. Student loans are one of the highest liability loans to have. If for whatever reason you can't pay those loans off, you can not discharge that debt. You can try to pretty it up and speak as if its good debt, but I would venture to say that a debt you can't discharge is something you should pay off first and foremost. But youre right, its a good ways to build credit. There are plenty of ways to build credit that are much safer. I have a $2500 student loan at 3%. Its the only debt I have outside of my car and I can pay them both off. Since I have the means to pay them both off if need to be, I am paying minimum amounts as to keep my credit active. Everyone situations are different, but under no means should we tell someone debt is good, regardless of how the lions view it. If someone owed me money and there was no way for them to legally discharge it and I could garnish their wages, you'd bet i'd call that good debt.
That's a good point. When I was relieving some business debt, I targeted one in particular because their online statement was terrible and it was just too hard to get information.
I agree and disagree to a certain extent. Like Space Ghost post above, debt is debt no matter how you look at it. If you go into bankruptcy, Sallie Mae will follow you. Yes, paying off all debt will lower your credit score. However, if you are debt free and continue to save, you will get better deals with cash. Cash is power. I am pretty sure I can get a better deal with cash then having debt and depending on financing. Good FICA score means you just pay a lot of debt. If you are a seasoned investor, then yes, you can use the funds to invest in higher ROI products. If you stick those funds in an index you may return 10%10-12%. However, if you are not a season investor like most people in America, you probably buy high and sell low due to your emotions. Look at how many people sold their positions when the market collapse in March 2009 because they freaked out. The same people probably never got back in the market well until now because they feel that they had missed the past 4 years of opportunity. All time highs, right? Yet, markets are severely overbought and the correction coming will whiplash them back to the bottom. Loss of equity AND you still have the debt. Double whamming. There is nothing better than being debt free. Because then, the true wealth building kicks in. Imagine if you do not have any debt or mortgage (last debt you pay off), each month you are contributing $2,500 (mortgage payment) into an SPY with ROI% of 10% for the next 15 years compound interest. You will have $1M in the account. In 30 years compound interest, $5.4M. Sounds like big number, but if you have a plan, it is definitely achievable. Let say you suck at investing and only return half. That is still $2.7M If you are a season investor, where you understand moving averages, support & resistance, etc etc. Instead of average 10-12% return on investment, you could have avoided the correction cycles and easily had a ROI% of 25-35% per year. Imagine that scenerio with the compound interest formulation above. That is only sticking funds into an index fund. What if you are an experieced option trader? Sick cash flow. People did not have to lose their retirement in 2009. There were PLENTY of warning signs. Tax deduction is good, but minimum in the grand scheme of things. Be debt free and build your wealth. The feeling is incredible compared to how is this finance manager at the local dealership is going to try to screw me for this car. You can tell them so f-off, here is my cash take it or I am going to the next dealership.