Why You Shouldn’t Pay Off Your Student Loans Early

My fiancée has a BS in Biology and a MFA in Forensics.  As you can imagine, she had to get a lot of student loans to cover the university costs.  $23,000 to be exact.  Fortunately, as with a lot of student loans, it is subsidized by the government.  Which means her interest rate on her loan is only 2.625%.

Having recently paid off her truck, she was going to use the money she would have paid on the truck to pay down her student loans a little quicker to safe herself some interest.  What she did not realize was that by paying off her student loan early, she was actually costing herself money from a missed opportunity.

There are many safe investments out there right now that are paying 5% interest.  These money market and CD accounts are a great place to put your money because of their guaranteed return.

I will spare both of us the calculations on this one.  They are involved and very complicated.  I will however, try to explain this abstractly.

Here’s the deal.  Her student loans have a 2.625% interest rate on them.  She can invest money safely in at a 5% rate of return.  So if she only pays the minimal every month on her student loans and uses the rest of the “former truck payment” to put CD’s, she will come out 2.375% ahead.

She still has to pay the 2.625% interest on the loan, however she is now earning 5% on the CD’s.  Here is the math:

5% – 2.625% = 2.375%

Basically she is earning 2.375% by choosing not to pay off her student loans early.  The government in effect is giving her low interest money that she can invest safely.  There is a catch however.  She must make sure she buys CD’s with the money.  If she does not and spends that money on clothes, then she is costing herself money.

Written by admin on July 19th, 2006 with 1 comment.
Read more articles on Making Money.

How To Make Money By Spending Money

Unless you have been living under a rock for the last few years, you should have heard of the rewards cards that many credit card companies are offering.  These cards often give you 1% cash back for purchases made on their credit cards.  This cash back is usually in the form of some kind of gift card that you can use at authorized retailers.

Do you have a reward card?  If you don’t, you should get one right away.  Because you are throwing away free money.  I recently convinced my fiancée to apply for a rewards card.  She was approved for a rewards card that gave her 1% cash back on her purchases.

The card has a credit limit of $1000, of which she has been charging $500 to each month.  At the end of the month she pays the balance off in full.  This is important.  If you do not pay the balance off in full, you are losing all the benefits of the cash back by paying the high interest rates on the card.  Make sure you only charge what you normally spend on the card.  Remember that as with all credit cards, you have to pay the money back.

She easily has $500 in bills and expenditures every month.  Before, she was using her debit card, cash and checks to pay for these goods and services.  Now however, she is using her rewards card and earning cash back.  At the end of the year she will receive a rewards card for $60.

As I always say, $60 bucks is $60 bucks.  I am not one to turn down easy money, and I’m still working on my fiancée.  Especially money that is this easy.  And remember this $60 has the potential to be a lot more than $60 if she uses it wisley.

Written by admin on July 12th, 2006 with 3 comments.
Read more articles on Making Money.

« Older articles

Newer articles »