Among the more popular questions we receive from our clients are ones having to do with student debt. Generally, people want to know if there might be particular strategies to consider. Since we haven’t addressed this in our e-letters for a while, let’s do that today.

First and foremost, let’s remember that student debt is debt. So, a lot of the rules are the same as handling any other kind of debt. Fortunately, it is pretty common knowledge that lenders expect to be repaid and a borrower’s commitment to that end is a legal, as well as moral, responsibility. Still, students are occasionally too optimistic about their job prospects (and earnings) after graduation and making those debt payments can suddenly become a nightmare.

Applying for student debt forgiveness is a possibility but a thin one indeed. The U.S. Department of Education rejected 99% of the applicants who applied for relief between May 2018 and May 2019, according to the Government Accountability Office (GAO).

Detail-wise, typical rates run from 4.5% – 7%, with a term of about 10 years. That’s a monthly payment of $324 and $9,702 in interest on the average debt of $29,200, assuming a nominal 6% interest.

Just as loans that are in good standing, troublesome ones can usually be managed. Set a plan for repayment, stick to that blueprint and prepare to be surprised at how quickly things get better.  Therefore, let’s look at more realistic ideas.

  1. Make more than the minimum payment. By adding just $100 per month to your payment, you’ll pay the average debt off three years early and shave a cool $3,000 off your interest payments (data taken from Bankrate.com loan calculator).
  2. Be sure to confirm the extra payments are correctly applied to the principal. This step is important, especially as it relates to the method you use to pay down your debt—see steps 3 and 4.
  3. Pay off high-rate loans first—the avalanche method. If you have more than one loan, make the minimum payment on lower-rate loans, but apply that extra payment to the highest rate loan first. There’s no reason to pay more in interest than necessary.
  4. Pay off the smallest loan first—the snowball method. This loan may not be your most expensive loan, but you may feel a sense of accomplishment from “checking the box,” or “wiping out” one loan. It’s visible, tangible progress when a loan fades into oblivion.
  5. Plus, by knocking one loan out, you can improve your credit score and lower your debt-to-income ratio.
  6. Don’t overspend, but reward yourself (with your spouse if you’re married) when you’ve paid off your first loan. It’s an accomplishment.
  7. Rollover the payment. Once you have eliminated the first loan, take that entire payment and roll it into the loan with the next highest rate (or the loan with the lowest balance). Do you see what you are doing? It’s called momentum. When that loan is paid off, you have additional cash to plow pack into the third loan.
  8. Keep the ball rolling until you’ve eliminated all your student debt. But don’t stop here. Once your debt is paid off, you may tackle credit card debt or save for a down payment on a home.
  9. Establishing the right patterns when you are young will pay dividends throughout your life.
  10. Can you refinance to lower rates? A lower interest rate may translate into fewer payments. But be careful about extending the length of the loan. Lower payments may tempt but the goal is to obliterate your student loans, not pile up additional interest and delay the day when you’ll be student-debt free.
  11. The auto-payment option. Just do it. Does your loan servicer offer auto-payment? Most do. You may save 0.25%, and auto-payment is a “set and forget” way of paying back debt. Besides, you won’t have to worry about missing a payment, late fees, and a black mark on your credit report.
  12. Be careful with extended payment plans. Such plans reduce your monthly payment and may be income-based, but it will take you longer to pay off your student debt and you’ll pay more in interest.

Your goal is to put your college debt in the rear-view mirror. Be strategic about your choices. Set up a plan. Use our pointers as a guide. As always, we’re here to answer your questions.

Ron’s Market Minute – A Few Random Thoughts

Faithful readers will note that I have commented over this past year that markets have been controlled by the conservative or defensive sectors and while we have leaned toward those areas in our clients’ portfolios, we continue to see strength in the same areas of Utilities, Real Estate, and Consumer Staples. 

It’s pretty hard to ignore the political universe in which we live, and we continue to receive questions related to how the markets are likely to react as different candidates appear to have public favor. So, that said, it’s way too early for markets to begin to price in a victor, or even to lean in the direction of one candidate or another.  However, as I’ve mentioned to a number of you, if the Democrats appear to be nominating one of the more extreme left candidates like Warren or Sanders, I would expect some market sectors to begin to behave a bit differently as 2020 progresses. If Senator Warren becomes the presumptive nominee, the markets will likely begin to become concerned about her anti-Wall Street, anti-big business, anti-wealth and success policies.  I believe her proposed wealth tax will create an enormous amount of arguments from both sides.  We have suspected this possibility since the Trump win in 2016.

As we look ahead to the final quarter of this year, I note that especially in pre-election years, markets are typically very strong after mid-October.  However, as we observed in 2018, this is by no means guaranteed. A couple of months ago I mentioned Dow 27,000 with a potential 28,000 by December 31st.  If things break right on earnings, geopolitics and the basic market fundamentals, there is still a possible scenario where stocks could melt UP quickly towards 30,000. If we see five market closes above 27,500 well before the Thanksgiving break, I will be expounding on that.

Despite the fact that markets finished Q3 pretty much unchanged, we saw quite a few very negative forecasts, behavior and sentiment. Most bouts of weakness have created quick shifts in sentiment as the media have proclaimed ‘the big one’ was upon us. As this bull market continues to be the most hated and disavowed in history, I believe it will continue until investors stop viewing every small pullback as the beginning of the end. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw[@]denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

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