student Loan and wealth

Student Loans: How to Pay Them Off and Build Wealth

The average college student graduates with almost $20,000 in student loans. While this is a daunting sum, it is still possible to build wealth even while paying off student debt. But earning the degree and paying for the degree require two different kinds of smarts. In fact, some students may be better off not taking their parents’ advice on how to get out of debt. Unlike most types of debt, student loans are usually best when paid as slowly as possible.

Almost all debt is bad debt. But, there are two important exceptions to this rule: home mortgages and student loans. Diligent savers can use these types of debt to their advantage.

Students often assume the best thing to do is to pay off student loans as quickly as possible. The sooner you pay off your loans, the sooner you can start building wealth, or so the thinking goes. But, given the opportunity, which answer should you choose: A) Make extra principle payments on your loan each month, or B) Pay the minimum amount due and save and invest the difference?

The real answer is: it depends. However as a rule of thumb, the lower the interest rate on your loans, the better off you’ll be just paying the minimum monthly payment and nothing more. Take the extra money you were going to pay on your loan and invest it instead.

The lower the rate of interest on your loan and the higher the average market return, the more it makes sense to invest your extra dollars instead of paying down on your loan. The difference between these two rates is known as the “spread.” If market rate of return is 11% and the interest on your student loan is 4%, then, the “spread” is 7% (11% minus 5%).

Let’s look at two examples. Jane and Joe each have $20,000 in student loans which are to be paid over 10 years at 4% interest. Joe pays his monthly payments of $202 plus $100 extra to retire his debt as quickly as possible. By paying making bigger payments, Joe is able to pay off his debt in just over 6 years. Now, with his debt out of the way, Joe invests the full $302 per month that he had been putting towards his debt. Ten years after graduating, Joe has paid off his school debt and his investments have grown to $16,728.

Jane decides to adopt a different loan repayment strategy. Instead of paying extra on her loans, Jane pays only the minimum amount of $202. She takes the extra $100 per month that she could have been paying toward her debt and invests it. She continues this simple plan for the full life of her loan. Because she makes no extra payments on her loan, she takes the full 10 years to pay off her loan. Now, ten years later, Jane’s loan is finally paid. However, her investments have grown to $21,700, beating Joe’s return by $4,972!

Jane has made more than Joe even though she only paid the minimum balance due on her loan. Instead of making extra payments as Joe did, she invested her money for a longer period of time. And even though Joe was able to retire his debt sooner than Jane, his big monthly investments were unable to catch up with Jane’s early saving. Jane was able to boost her savings by starting early and harnessing the power of compounding interest. In the investing world, we call this principle the ‘time-value’ of money.

However, this model is not ideal for everyone facing student loans. The smaller the spread between your loan interest rate and the average market return, the less appealing this strategy becomes.

But, there is one additional reason students should consider paying just the minimum monthly payment on student loans. Student loan interest, like home mortgage interest, is tax deductible. By allowing you a tax deduction of up to $2,500 for student loan interest, Uncle Sam is, in effect, helping to subsidize the cost of your loan. The faster you pay down principle, the faster you lose your tax deduction, which is one more reason that paying just the minimum may be the best option. And, with the savings from your tax deduction, you have more money to invest at higher rates of return.

In order to benefit from this loan repayment strategy, you must save and invest your money. If you don’t invest the extra money, you would have been better off putting your extra dollars toward the repayment of your loan. But before deciding on a loan repayment strategy that’s right for you, be sure to take care of the basics of first.

Learn about your loans: Many student loans allow for a 6-9 month grace period before loan repayment begins. During this time, your loans may be charged a lower rate of interest. Consider consolidating your loans and locking in your interest rate while your loans are at a lower rate. This may not only help keep the cost of borrowing lower, but it will mean you only have to write one check per month.

Establish an emergency fund: You should have enough money in your emergency fund to cover three months of expenses. This money should be used only in the case of emergencies, and not for those late-night runs to Taco Bell.

Pay off your credit card: It’s estimated that college graduates carry an average of $2,500 in credit card debt. Most credit cards have very high interest costs. Be sure that you are not one of them. You cannot build wealth while paying 19% interest on your credit card purchases. Do not begin investing until you have an emergency fund and have eliminated your credit card debt.

Sign up for free money: If you have just started a new job, check to see what type of retirement benefits your company offers. Many companies will match your contributions dollar-for-dollar up to a certain percent of your pay. In other words, you get free money if you invest in the company retirement plan. Make every effort to contribute enough to get the full match. By doing so, you are, in essence, receiving a 100% return on your money. And, don’t assume you are too young to save for retirement. By saving now, and harnessing the power of compounding interest, you’ll have enough to retire long before most of your friends. Remember the time-value of money!

Contribute to a Roth IRA: Once you’ve built up an emergency fund, paid off your credit cards, and taken advantage of any free money available through your employer, make every effort to invest any remaining dollars in a Roth IRA. A Roth IRA is the ideal place to put those extra dollars you were otherwise going to apply to your student loan principle.

Building wealth takes time. By starting early, you’ll be sure to make the grade.

Read more:
http://www.savingadvice.com/blog/2007/11/15/101886_student-loans-how-to-pay-them-off-and-build-wealth.html

Loan

Legislation enforces regulations on student loans



On Nov. 1, the Department of Education released a new set of regulations on the student loan system.
The $85 billion a year student loan industry faced a lot of scrutiny over the past year with regard to the relationships between universities and alternative lenders.

"I am pleased to see the long and deliberative negotiated rulemaking process produce final regulations that are a major step forward in improving the transparency of the student loan programs, ensuring borrower choice and restoring confidence in the federal financial aid programs," said Margaret Spellings, Secretary of Education in a press release.

The regulations were drafted after New York's attorney general, Andrew M. Cuomo, conducted an investigation into these university-lender relationships. The investigation found many cases of payoffs, kickbacks, gifts and donations given by alternative lenders to financial aid employees.

One of the most extreme cases of these inducements took place at John Hopkins University last May. Ellen Frishberg, financial aid director at Hopkins, resigned after an investigation found she had been paid $65,000 in consulting fees and $1,200 in travel expenses since 2000 by Student Loan Xpress, one of the lenders Hopkins recommended to their students. Fishberg was using the consulting fees to pay for her doctoral degree program.

"We did have one incident a little over a year ago where one employee in the office made some statements that gave the appearance of the way we handled alternative loans in a way we didn't handle them," said Barry Simmons, director of university scholarships and financial aid.

One of the primary regulations was put in place to prohibit these kinds of inducements. Many of the other new regulations deal with preferred lender lists that many universities, including Tech, provide for its students. Regulations now insist universities place at least three lenders on the list and detail why these lenders are preferred above others.

"What we provide are banks and loan companies which students have gotten loans from over the last several years," Simmons said. "Generally, the lists were constructed essentially by looking at their loan products and feeling they were good loan products and having a good experience with the lender."

Tech's financial aid office provides a list of 12 alternative lenders. Among the 12 are large companies such as SallieMae and Wachovia as well as smaller companies that are mainly for student loans, such as Campus Door and Nelnet.

Although these new regulations are just rules put forward by the Department of Education, a bill outlining the regulations has been passed through the House and is awaiting presentation in the Senate.

"I think a lot of the change in response to the investigations has already happened," said Kevin Bruns, executive director of America's Student Loan Provide. "This bill goes further and it puts it into law, because right now they are just regulations."

Spellings said that although these regulations have been long overdue, she is not giving up on improving the student loan industry. The new regulations are to be put into effect this July and will hopefully provide students with a renewed sense of trust in the financial aid system.

"The sooner people have full confidence in the financial aid system, the better," Bruns said.

Read more:
http://www.collegiatetimes.com/stories/2007/11/16/legislation_enforces_regulations_on_student_loans

What teenagers want in life?

If we do not understand why some teenagers reaction is such.. let us try to understand what do they really want in their life....

The truth facts are, teenager want
1.0 Friendships - the close emotional relationships tend to move more toward their peers. Our teens will largely find their needs for understanding, support and guidance coming more from friends than from family. THere are 1,770,000 websites in google crawler discussed about the need to friendship in tenage world.
2.0 Freedom - is something most teenagers want a lot.
3.0 Independence is something that you have to earn through trust and integrity. You are not born independent, but you learn to become independent. Independence is something teenagers want , but can't always get.