Living on a Budget, Saving Money/Repaying College Debt
QUESTION: I am a 1st year college student who has a $5,500 unsubsidized loan at a 3.86% interest rate. I don't have my first payment due until 1/10/2017 (which is odd because I won't have finished college at that time). In any case, I am wondering how I should handle this. Between my parents and I along with scholarships, I don't have trouble paying the remaining school bill. I will likely use this loan each year.
Through tutoring, I'm able to make a bit of extra money on the side. This goes toward my loan repayment. I just paid $1300 toward it. My question is...is there a better way? With an interest rate of only 3.86%, is there some bond I could get into with an interest rate around 6 or 7% and eventually have enough in it so that the interest I receive is greater than the interest I owe each 6 months (or however often I get a bond payment)?
I don't have extensive finance background, I was simply thinking about it mathematically today and thinking that if I can be above the minimum payment by the time I have to start repaying, I could pay it off and still have the principal. Just looking for your comments on if this is possible or wouldn't work.
Thanks for your time,
ANSWER: the reason why the first payment is 2017 is add on interest. the loan costs effectively 4% a year. or approx. .035 a month in interest. this is figured this way. 12 % interest is 1% interest cost per month..ie a 5 k loan costs 50 a month at 12% . 25 a month at 6 %....and 12.50 a month at 3%..so paying 100 a month can reduce principal and kill all interest. 115 a month should reduce your loan principal 100 a month.
as for bonds I don't do bonds. but you might look into taxfree municipal bonds ..WITH NO LOAD.. that means you aint paying any broker fee..see if AAA rated bonds are avail in your state. usually power company or city bonds have this rating. and the income must be tax free or its useless.
you could also look at a utility stock that has a high dividend ratio.. if the dividend payout is above 6% vs the stock share price..then you break even but your stock shares may go up. and you owe nothing on the profit till you actually sell the stock and take profit. I hold some us bank and I bought at 22.. its now 40 a share..so I keep the dividend and enjoy the increase..NEVER reinvest your dividends.. usually the stock is at a high when the ex dividend is paid. you can save 2-5 bucks by tracking the stock and using your dividend money to buy at a low.
forget about q calculations and other bull brokers spew. I follow us bank SYMBOL USB and DPL Dayton power and light..and have never been hurt by holding these stocks..
get a yahoo account.. open up a finance portfolio and follow stocks year to year and make a graph. you will soon see consistant movement patterns that are predictable.
I follow ibm and catipillar and wal mart. when I see a traditional low occur at a period I marked as a consistant low. I look to buy. example I know ibm goes down around the 15th to the 25th of jan and when I see it drop I compare it to its low.
right now ibm is 182 it was 190 a week ago. its low is 173..so by 30 jan I will see if its around 179.. if yes I will buy the 185 call option good till jan 2015 or 2016 if available..it will cost me 1500 to control 18,000 worth of stock for a year or 2. the moment the stock moves up 3bucks. I will get out of my option at a 1 dollar profit.
I know this stock and its options
I know it pays 30cent on the dollar for each dollar the stock goes up the option increases 30 cents..thus a 30buck increase since the option controls 100 shares.
the 100 buck return on the 1500 invested is aprrox 7%..if I do this 4 times a year I make 28% return overall. show me a bank that's gonna pay you 28%
IF you cant find a investment that pays you 6% after tax profit. just pay your loan off and bank your money. if you can. then you decide what your debt comfort level is.
at one time I had 145k out on credit cards at 3.9 and 5.9 % life of the loan balance transfer loans and made 15-20% return on that money..10 years later that debt is 50k and I still make 15-20% on the original 145k balance.
I paid the monthly payments with my job and left the investment money alone.
I aint dave ramsey. debt does not scare me. as I can break those investments anytime and pay the debt in full and still have money left over.
TYLER HICKS once said the secret to success in business is the effective use of other peoples money.
that means make more return off your money borrowed then the interest it costs you and you win.
---------- FOLLOW-UP ----------
QUESTION: Thank you for your detailed reply. I don't think I have the time to really dive into stocks at this point like you have. I could possibly do something with dividends, but those are taxable plus I'd have fees for buying and selling. That means after fees and taxes I'd have to be making nearly 4% just to keep up IF I could invest as much as I owe...But I'm not able to do that at this point. Maybe half-ish (I could maybe invest $1500 of the $3200 I will owe at this time. Obviously that number would grow, but I'd again be paying fees for each new investment, correct?
the fees are small. example Charles schwab would be 12 bucks a side on a buy sell or 25 total on a discount acct that you direct. and dividends are taxed at your ordinary rate. so if your in the 15% bracket that's your tax rate for your dividend interest and I believe the first 400 paid is tax free..check the irs on that..
you would only pay the 12 bucks to buy the stock because you plan to hold it long term. and yes each new buy is a 12 buck fee.
about the cost of a couple 24 packs of pepsi.
and as long as you show the paper trail from the loan to your investment. the loan interest is a deduction then against profits.
as for following stocks, you can never be too young to start tracking a few stocks and be familiar with their up and down trends..
in my first answer I said ibm was 182 and I was looking for 179 as a buy point..notice how my prediction of 179 came true on Friday.
worst case just follow the dave ramsey plan. pay those loans off asap and then bank 30%-50% of your tutoring money left over after all your normal monthly expenses are paid. the other 50% is fun money
an update as of 2/14/2014 ibm went down to 174 as its bottom and is now back at 183.
you may remember that i mentioned that at 179 i was going to be looking to buy ibm . back in my original answer to you.
the call option i bought made a 180.00 per contract profit. ie another 15% profit in the bank no as i sold the position friday.
this is the type of investing i do because it works
good luck in your future pursuits