Want to get rich? Don't pay off your student loans
money.cnn.com
money.cnn.com
Pay off your debts, and avoid being in someone else's pocket for as long as you can.
Keep paying using the money you've saved from investing. I mean, if you have no will power, aren't organized, can't save because you have a gambling problem, etc., paying off your student loans sooner might make sense.
Debt is an awful burden to carry around for years. It limits potential decisions. When things go wrong in life, and they do, the timing is never great. Do "future you" a favor and ditch debt when you can.
Source: life experience
https://studentaid.ed.gov/repay-loans/forgiveness-cancellati...
It still seems true. Simple bankruptcy does not wipe out your student loan debt. You need to go above and beyond bankruptcy and win a court case against your creditors in court after you've declared yourself bankrupt.
That way you can graduate debt-free, and have international experience and network, and might even have picked up a new language.
If you absolutely have to have a brand-name degree from an American university, get a masters. Much quicker and easier to get in.
It's generally only for citizens or, at best, EU residents. The same universities charge a lot more if you're not European. Though not as much as American universities, of course.
What do you call someone who speaks three languages? Trilingual.
What do you call someone who speaks one language? American.
Foreign universities have zero name-recognition in the U.S. Maybe Oxford or Cambridge, and even those only among a certain set (and that set does not include everyone you may want to impress with your resume).
Not saying it's possible for everyone to swing it, but resume-wise people pay attention only to last educational institution and last employer.
I teach at a large, well-known (in Europe), and decidedly mediocre university. I always get my top students into masters and PhD programmes at top universities where they then tend to do well. Mediocre universities often try their hardest to help their top students.
I do this in parts because that's also my own trajectory: undergraduate at mediocre place, PhD at top school.
Or become a hedonistic autodidact!
I'd imagine even with free tuition, I'd imagine Sweden is more expensive than going to your local state school. And you can't get US financial aid or loans for foreign school.
People always compare brand name American private schools with public school in other countries. But America has public schools.
You can do your first two years at community college for near free. You can live with your family, work part time at McD's and have more than enough money to pay for school. Even if you don't want to work, poor students can afford tuition with Pell Grants, and middle class students can cover it with Stafford Loans.
Then do your last two years at a state school, which are often in cheap college towns. In a state like Illinois, you can do 2 years in community college, and then 2 year at UIUC--a world class university--for only like 30k in tuition for the whole 4 years.
It wouldn't surprise me if going to Sweden cost 30k more in living expenses over that period, especially if you live with your family for the first 2 years.
An associate's degree can pass in a number of professions. And there's a big push from Republicans to get more people into community colleges for more mundane work. HVAC, Machinist, Plumber, Mechanic... these jobs only require an Associate's degree and earn about the average income in America. Which is around 40k/year.
The "Rock Stars" within a profession always make a sizable chunk of money. Be it programmer, engineer, lawyer... even blue collar workers. I have heard plenty of HVAC guys who start their own company in a nice area and make 6-figures.
But to even out the variance, I use the Bureau of Labor Statistics to report the median wage for professions. BLS states 40k for these workers, so that is where I get my numbers from.
I wrote a blog post on this, actually: http://colinschimmelfing.com/blog/why-im-irrational-about-re...
btw great job on Clever...very interesting.
I guess the articles from graduate investors from 2008 didn't seem to make it past the editor.
Going forward, we are in a different environment where 9% might not be the annual return. Interest rates are almost nothing and not going back to late 70's level in the foreseeable future.
This guy basically got lucky by having spare income to invest at the bottoms of a stock market. Hardly advice I would give anyone now, where investing now is closer to buying at the top of the market at 2007 than at the bottom of 2009.
Better advice, pay off your debt with the highest interest rates first, have an emergency fund, invest any extra income you have.
I've always invested and paid minimums to student loans and mortgage. I also locked in student loans and mortgage at very low rates, plus the effective interest rate is lowered by the tax advantage.
I've been investing in low fee index funds, because I'm not a stock broker, since 2002 and I have averaged about 14% growth year over year. That is much higher than I expected, but even at a modest 6 or 7% annual growth I would still be well ahead of paying off my student loans and mortgage. I never carry a balance on higher interest forms of debt such as credit cards.
This isn't quite the most sage advice. The opportunity cost of student loans is actually the interest that compounds over long periods of time. Making high student loan payments (as a large percent of your income) early on, and taking advantage of the maximum deductible portion of student loan interest can be smart. (http://www.irs.gov/taxtopics/tc456.html) But again, depends on how you "play" in the S&P.
Taking into account the fixed 6.5% interest rate the government backed lender was happily reeling in, and my skeptism that the stock market can continue to rise against printing press backed economies, I thought, screw it, let's just get it over with.
Not sure what things are like outside the States, but within the easy-money-for-18-year-old-kids market, it's a serious racket -- I had little awareness at that age of what I was getting into, and only later did I realize that, hmmm, the bachelor's in literature and master's in psychology...were pretty much completely useless given my profession: computer programmer o_O
Some high % of Americans think the same thing about a new car every 3-5 years. This is a little more insane as people could build a lot more wealth if they drive a car 10 years, and use the extra money to invest in wealth building.
So in a perverse sort of way, I see where this ad is coming from. My guess is with a house, you have a physical object. You can (usually) unload it and pay the loan back. The car is losing value fast, but you are in a similar boat. I guess student loans are an investment in your brain and not a thing, so people hate them more?
I don't understand peoples logic here. As if knowing differential calculus and working to pay of tons of debt is somehow better than perhaps being a mechanic in middle america where they have time to travel the country and have little fun. Not saying that this is the case for the majority, but we're coming awfully close to it.
Let's at least be honest here. There should be a relationship between size of the debt you are allowed to accumulate, and the annual salary of the related profession. I think there often is not.
You might have 30 years of enjoyment from your art history degree even if you never get an art history career to pay the bills, which is fine, if you understand what you are buying.
Since 1985, cost of college has increased by about 500% [1].
1. http://www.washingtonpost.com/blogs/worldviews/wp/2014/10/29...
10% RoR is extremely optimistic, especially given that we are already in an optimistic, overpriced bull market that will not last (there are always corrections).
In addition, this 10% is on the S&P, so you'd have to assume that you only put money into an S&P fund and not any individual stocks, bonds or secondary securities. Those funds have management fees, so that too eats away at your yield.
But perhaps what is most important, is that plenty of people did quite poorly this year (the average return it appears was around 4.5% this year) so his assumptions are heavily weighted on speculation, volatility, and unproven performance.
The fact that the author was overpaying because "he didn't like debt" tells me a lot about his financial expertise to start. That aside, of course go with the higher return stuff, contribute to your 401K for your company at the max instead of pushing it toward student loans, but the rest of the logic is somewhat baffling given any sort of perspective on the market.
I keep going back to the "Turkey that doesn't know tomorrow is Thanksgiving" analogy on this. Must be bliss to have such a short memory.
An index fund (as a rule) has extremely low fees. See Vanguard.com for an example. If you have more than $10k in a Vanguard index fund your fees will be .05%.
If you're thinking about how you did this year you're thinking wrong: stocks are a long term investment, not a get rich quick scheme.
Basically, if you want security, try to get rid of student loans. I built up home equity and am now rolling my loans into a mortgage. 3% interest rate is lower than any refi options, no worries about the rate going up, and if I ever go broke, then worst case scenario I lose the house and am debt free.
The reason is that net worth and liquidity are two very different things. I'd much rather have $20k in a checking account and a $40k student loan balance with a $500 monthly payment then a $20k student loan balance and a $500 monthly payment.
Secondly, given the that potentially some of the interest is deductible, and that the term on a student loan can be 10-25 years you can ~breakeven in the fixed income markets investing in bonds as opposed to paying down your student loan (or you can keep the maturity of those investments shorter, have a moderately negative carry, and be short interest rates)
-5.65% from 1/2000 to 1/2010 with dividend reinvestment
+89.85% from 1/2000 to 12/2014 with dividend reinvestment
The annualized returns are generally over rolling 30 year periods. which 12/1984 to today is 8.79% without reinvestment or 11.32% with reinvestment of dividends.
They'll be a bit lower once you factor in taxes, which can be a sizable chuck (especially because that tax difference "compounds" year over year in the reinvestment case)
http://www.nytimes.com/interactive/2011/01/02/business/20110...
Even better, if your employer matches pension contributions, 100% right now is just about unbeatable.
Of course if you don't believe your pension will be around for you when you retire, perhaps you might disagree.
Paying off your debts is reliable. Gambling your borrowed money on the stock market seems like poor advice in general, even if the historical average works out.
You gotta plan for the worst, and in the worst case, your money is worth half of what you put in two or three years from now AND you got a massive student loan burden.
Personally I was considering putting all my loan money into bitcoins but decided to be responsible. Sort of kicking myself in the ass for that decision.
>Sure, that is simplifying it a bit. Obviously, the stock market doesn't return 10% every year on the dot.
He mentions this as an aside but it's very important to consider the time period he invested in. Below is the continuous return for S&P500 in a 4 year period:
End: 1848.36 (12/31/13) Start: 1115.1 (12/31/09) Return: 13%
End: 1426.19 (12/31/12) Start: 903.25 (12/31/08) Return: 11%
End: 1257.6 (12/30/11) Start: 1468.36 (12/31/07) Return: -4%
End: 1257.64 (12/31/10) Start: 1418.3 (12/29/06) Return: -3%
End: 1115.1 (12/31/09) Start: 1248.29 (12/30/05) Return: -3%
End: 903.25 (12/31/08) Start: 1211.92 (12/31/04) Return: -7%
End: 1468.36 (12/31/07) Start: 1111.92 (12/31/03) Return: 7%
End: 1418.3 (12/29/06) Start: 879.82 (12/31/02) Return: 12%
End: 1248.29 (12/30/05) Start: 1148.08 (12/31/01) Return: 2%
End: 1211.92 (12/31/04) Start: 1320.28 (12/29/00) Return: -2%
End: 1111.92 (12/31/03) Start: 1469.25 (12/31/99) Return: -7%
End: 879.82 (12/31/02) Start: 1229.23 (12/31/98) Return: -8%
End: 1148.08 (12/31/01) Start: 970.43 (12/31/97) Return: 4%
End: 1320.28 (12/29/00) Start: 740.74 (12/31/96) Return: 14%
Hardly the no-brainer the author makes it out to be. In fact, only half the returns were positive. Maybe it's unfair to consider a 4 year time period, although that is what the author states. The 10 year returns still don't look great.
End: 1848.36 (12/31/13) Start: 1111.92 (12/31/03) Return: 5%
End: 1426.19 (12/31/12) Start: 879.82 (12/31/02) Return: 5%
End: 1257.6 (12/30/11) Start: 1148.08 (12/31/01) Return: 1%
End: 1257.64 (12/31/10) Start: 1320.28 (12/29/00) Return: 0%
End: 1115.1 (12/31/09) Start: 1469.25 (12/31/99) Return: -3%
End: 903.25 (12/31/08) Start: 1229.23 (12/31/98) Return: -3%
End: 1468.36 (12/31/07) Start: 970.43 (12/31/97) Return: 4%
End: 1418.3 (12/29/06) Start: 740.74 (12/31/96) Return: 6%
End: 1248.29 (12/30/05) Start: 615.93 (12/29/95) Return: 7%
End: 1211.92 (12/31/04) Start: 459.27 (12/30/94) Return: 10%
End: 1111.92 (12/31/03) Start: 466.45 (12/31/93) Return: 9%
End: 879.82 (12/31/02) Start: 435.71 (12/31/92) Return: 7%
End: 1148.08 (12/31/01) Start: 417.09 (12/31/91) Return: 10%
End: 1320.28 (12/29/00) Start: 330.22 (12/31/90) Return: 14%
Picking stocks as the author alluded to will probably make the actual results much worse.
I think it's generally irresponsible to give one data point and an oversimplified statistic about average annual returns to financially vulnerable students. Especially considering that the authors approach would essentially be a levered bet. Tax implications aside, if you're paying 3-6% interest on your loans, paying them off is a guaranteed return. Compare that to the appropriate risk-free benchmarks and you'll see that it's definitely a smart decision to payoff the loans as soon as possible.
Few notes, returns calculated are continuous compounding although I don't think student loans are continuously compounded. Also, I chose year end dates for convenience, although I'm sure if you took other dates, your results would vary greatly (but that's sort of my point)