I am 23, just graduated from business school, I worked and played baseball so I only have about $8,000 in student debt. I am currently working a job making around 40K a year and am renting a place with some roommates.
I am eager to get started but am hesitating because I kind of want to be debt free going into my first investment. I have no assets besides my car that is paid off. I have a 645 credit score so I guess I'm just wondering if I should wait or just go for it.
I don't know if it makes sense to incur more debt or work on being debt free and try to establish a better credit score.
I am looking at the East Lansing (MSU) and Lansing market because that is where I currently work and live.
Thanks for any help in advance.
Go for it but find a good deal. Student loan debt is the easiest debt to manage. You have all kinds of options. Don't put off your future in real estate. If your return is 20% in real estate who cares about 6% in student loan interest. I'll do that all day and on Sunday.
$8000 Seems like such a small amount to conquer, I'd personally just get rid of it... but it also depends on your interest rate. Personally I'd Live frugally, keep educating yourself and it could be gone very quickly!
@Jack Ropp I just wanted to chime in because I'm also a recent graduate, 23, with 50k in student loans, and just closed on my 22nd unit. I have no interest in paying off my student loans early for the same mathematical reasons that many others have already mentioned. To each his own, but I think the biggest risk you can take is not taking any risks. Go get em!
Building wealth is about acquiring assets. If your money is your 'worker' then put it to work in an asset (in this case real estate). By paying off the debt, you are essentially killing your workers. Dead. The money cannot go out and go to work for you. I understand that your student loans are 'bad debt' and it may help you sleep better at night knowing that they are paid off, but it will not move you closer to financial freedom. Especially in the Lansing area. That additional $8,000, when properly applied towards real estate is darn near a 20% down payment on a SFR. I have 4 houses in the Lansing area. My average cash out of pocket is $14k to acquire a new rental and I earn over 30% returns on this money. My advice is build up some savings/reserves and then get into real estate as quick as you can. Time is your friend in this business. Let the magic of compounding go to work for you sooner than later. As others have said...worst case scenario is that real estate investing doesn't work for you and you are still left with the student loan debt. However, you are young and have time to recoup.
We rarely regret our decisions to act. We regret most the actions not taken.
Paying the student loan debt wouldn't be a priority for me, for reasons already mentioned.
To increase your credit score, you should have 3 credit cards. Two report a zero balance every month and the third reports less than 8.9% utilization. Alternate which one reports a balance. That doesn't mean you can't use them, but pay them off when due, so they report correctly to the credit bureaus. There is also a FICO boost when you have 5 cards, but only after you've had them for 2 years. Only let a balance report on 1/3 of them, and only less than 8.9% utilization (for optimal credit scoring). (Avoid store cards. Get real cards)
You would also need an installment loan, but your student loan counts for that. When you pay that off, you need to carry at least one installment loan to have a "mix of credit" on your credit report.
If you have anything negative on your report, message me. I may be able to tell you how to address it.
Time is your friend. You're young and can really set yourself up for success!
Finishing a 4 year degree with only 8k owed is pretty good. If you start aggressively paying down that meager debt while simultaneously saving a good chunk of each paycheck and you'll be in business in no time. Set up direct deposit at work (if possible) and have a percentage deducted from each paycheck that goes straight into saving's towards your goals. You won't be getting rich with the 1% APY from a saving's account, so get that money invested in a starter flip or rental giving you 25-30% ROI.
Good for you for starting off your life on a good note. I owe about $40K on my student loans and I don't make that much money, so I am going to start saving my investment capital rather than paying down that debt. The problem with saying "you should pay it all off" before investing is that if everyone did that, the VAST majority of the population would be disqualified from investing until they are well into there later years.
The idea is being young enough to enjoy financial independence, rather than half to work all your life for it. it sounds like you do not have to worry about that though.
@Jack Ropp and @Josh Bauerle student debt is worse than credit card debt. Credit card debt is unsecured. Student debt is usually permanent debt, meaning it survives even bankruptcy. Carrying student debt is reckless if you have the income or means to pay it off. Incurring the debt for your education was a good investment, but now you need to pay it off.
@Jack Ropp and @Josh Bauerle student debt is worse than credit card debt. Credit card debt is unsecured. Student debt is usually permanent debt, meaning it survives even bankruptcy. Carrying student debt is reckless if you have the income or means to pay it off. Incurring the debt for your education was a good investment, but now you need to pay it off.
this is one of the few comments here that I will say is as close to wrong as possible in a risk assessment thread, which is what this is.
Student loan debt is very flexible and payments can be adjusted based on your income, and you can apply for hardship deferments. You cannot do that with CC debt. Student loan debt is also carried at an interest rate at a fraction fo CC debt.
@Joe Splitrock No, I actually don't need to pay it off and it most certainly isn't reckless.
From a wealth building standpoint, depending on the interest rate you are paying, I would consider it more "reckless" to pay it off and not do something that generates FAR better return than the 3 percent interest I'm paying on the loan. Now I totally get people wanting to pay it off for peace of mind, etc. But simply by the numbers there are much better things to do with your money.
I simply cannot possibly disagree more that student loan debt is worse than credit card debt simply because it is secured. CC debt is likely 15+ interest rate. I could not care less whether my student loan debt is secured or unsecured. I have well over the assets to cover it and if everything came tumbling down I'm not too worried about them coming to make me pay my student loan payments. I will have far bigger problems at that point.
@Jack Ropp and @Josh Bauerle student debt is worse than credit card debt. Credit card debt is unsecured. Student debt is usually permanent debt, meaning it survives even bankruptcy. Carrying student debt is reckless if you have the income or means to pay it off. Incurring the debt for your education was a good investment, but now you need to pay it off.
this is one of the few comments here that I will say is as close to wrong as possible in a risk assessment thread, which is what this is.
Student loan debt is very flexible and payments can be adjusted based on your income, and you can apply for hardship deferments. You cannot do that with CC debt. Student loan debt is also carried at an interest rate at a fraction fo CC debt.
Credit card debt can be negotiated. People routinely pay off just a fraction of what they owe or walk away all together. Yes you can defer student loans, but most stay there permanently until paid off. When deferring payments, you are still incurring interest.
First off once again the wealth of knowledge, experience, and information that I have received on my first post is absolutely incredible. The amount of support on here continues to blow me away.
I would love to pick up some part-time weekend work with some local investors around the Lansing area, I'm willing to help any way I can. Please feel free to message me if you are in the area and need some help in any way.
That being said I always try to find the most logical way to analyze a situation no matter what that situation is. I think the most logical thing for me to do is work as much as I possibly can and continue to save, pay off loans, and learn.
My goal in one year is not to have my student loans paid off but to have $25,000 in savings and a credit score above 680. I will continue to pay off loans but at a 3.25% interest rate, I believe that it makes more sense to save to invest before paying off the entirety of the loan.
The best course of action for me I think would be to invest in a multi-family, rent out and live in the other unit.
Thanks again for all the help, and advice!
@Jack Ropp I think that paying the debt can be a bad move because the interests are quite low. However here in BP, you will find different opinions, the only one who knows what you should do is you. I say this because, if you are a person who does not know how to handle debts and is always above the budget, very probably the first solution is to pay the student fee. But if you have things under control and spend less than you earn and save, there would be no need to quickly pay off the debt. On the other hand, real estate will give you some financial freedom and if you do not feel comfortable in having an $ 8k debt, how will you do when you have to manage debts of $ 100k or $1M with higher rates. You will not be playing Monopoly, this is real life. Welcome to real estate.
@Jack Ropp I'm not a recent college grad, but definitely, share your position in regards to student loan debt (my debt was much higher). Based on my real-world experience, here's my advice to you:
#1) Do not let student loan debt deter you from investing. Instead, let it provide you with incentive and motivation.
#2) If cash is King, then credit is Queen. Relentlessly work on building the best credit score possible. Having great credit can/will make it much easier to acquire funding on your own.
If you need help rebuilding your credit, reach out to me and I'll share the steps I took to rebuild and repair mine.
#3) Be prepared and willing to make financial and lifestyle sacrifices. Picking up a 2nd job, not going out with friends as much and avoid making frequent 'empty' purchases (ie: expensive shoes and clothes) are examples of sacrifices you can make in order to reach your financial goals quicker.
#4) Start working towards your goal(s) as soon as possible. Personally, I was a late bloomer in regards to financial responsibility and didn't take things seriously until my mid 20's. Therefore, I had to work extra hard and make extreme sacrifices in my late 20's to position myself for success now (early 30's).
@Jack Ropp I'm in a very similar position; my wife and I just became debt free from our student debt, and we'll be looking at investment properties in 2018. We worked ourselves to death to get out of student debt as quickly as possible....student debt is one of the only types to stick around through even bankruptcy, but that's besides the point: having control of your money and not letting it just disappear each month to loan payments, is incredibly liberating and exciting. Money is 80% behavior and 20% head knowledge.
Hi @Jack Ropp I actually bought my first investment home with my student loans!
I personally would say go for it as student loans have small percentage of interest rate and it is easy money you can obtain to make more money out of!
I saved up about $14,000 and bought my first house and flipped for $35,000. I am invested and flipped 3 properties now with cash and bought my 4th property last month which is currently renting and in 2018 I will sell flip as well.
My husband encouraged me to use my student loans to get into real estate investing and honestly I am glad I made that decision! :)
Do not pay the student loan debt. Get on income based repayment and make the lowest payment you can. On an income based plan, you pay a % of your income above the poverty line. If you don't make poverty, you don't pay. If you don't pay the loan, it is forgiven after 20-25 years.
That is the friendliest debt I've ever heard of. My banker doesn't care if I only made poverty. They want their monthly payment.