Let’s walk through a quick simple example. Using the Federal Student Aid Repayment Estimator average loan balance of $34,722 for a 4 year Private-For Profit institution with an interest rate of 3.90%, you would have to pay $350 a month for 10 years to pay-off your student loans. I assume your single and have an Adjusted Gross Income of $40,000.
What if that same $350 a month were instead put into your 401(k) or an IRA. Let’s run the numbers.
Let’s assume you started paying your loans at age 24 and you were fortunate to never enter into any type of deferment or forbearance. Under a Standard repayment plan you would make your last payment at the end of 120 months or 10 years. This means you would finish payments at 34 years of age. Let us also assume that at that point you start contributing that $350 in excess cash available into your 401(K) or an IRA. At age 65 with a return of 9% you would have an ending investment balance of $710,537.94. Not bad, right?
Let’s see what happens if instead of starting to contribute at age 34 you did so at age 24, 10 years earlier. At 65 you would have an ending investment balance of $1,810,012.84. Same 9% return just more contributions.
Let me put that another way. Your student loans cost you $1,099,477.89, which is the difference between the ending balance of starting at age 34 vs. 24. That is a HUGE opportunity cost.
Would you rather retire with $710,537.94 or $1,810,012.84?
Obviously, your situation will probably look a bit different but the opportunity cost will be present. You need to take control of this debt and aggressively look for ways to eliminate it. Guess what? It won’t disappear on its own.
Analyze your current situation and explore different repayment strategies that will help you eliminate it once and for all. Let me know if I can help! Don't forget to check us out here.
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401(k) and IRA fees, expenses and taxes were not included in this simple calculation as everyone’s situation is different. Actual returns will vary and depend on customer’s objectives, risk tolerance, and asset allocation, among other things.
Hermes Conesa CEO @ Simpleivest, LLC