# In our final example, the loan and expected annual investment return are the same

In our final example, the loan and expected annual investment return are the same

Although I personally believe you’ll do better than 5% investing in stocks over the long run, many people may disagree. In this case, whether you invest or repay the loan early, you come out even.

So what expected rate of return should you use to make your own calculation? I think 7% is a totally reasonable target and may even be on the conservative side. I’ve heard Dave Ramsey use 11 or even 12% as his expected investment returns. It’s possible, but I wouldn’t bet on it. If you’re a more aggressive investor, use 10%. If you’re more conservative, stick with 6 or even 5%.

## Income-based repayment plans

Some lenders allow you to reduce your monthly payment if you don’t earn a lot. Typically this program is designed to help you get started in an entry-level job or if you’re working part-time while looking for full-time work. You’ll want to start making the full student loan payments as soon as you can afford it.

With reduced payday loan cash advance Covington payments, you may not be paying much principal each month-or you may not be paying principal at all-just interest. At that rate, you’ll never repay the student loan-the payments will stretch on forever.

Lenders require your overall debt-to-income ratio (the sum of your monthly debt payments, including your new mortgage, divided by your gross monthly income) to be less than a certain limit (on average, 40%). For example, if you earn \$60,000 a year (\$5,000 a month) and have a \$300 student loan payment, a \$300 car payment and are applying for a mortgage with a \$1,000 payment, your ratio is 0.32 and OK.

Let’s say, however, you’re a recent law school grad with \$1,400 in student loan payments, no other debt, earning \$85,000 a year and applying for a mortgage with a \$1,500 monthly payment. This puts your ratio at 0.41-too high to qualify for the mortgage.

• Reduce the mortgage payment (by putting more money down, extending the term, or finding a cheaper house).
• Reduce your monthly student loan payments.

Unfortunately, paying extra towards your student loans does not reduce your monthly payment-it merely shortens the number of payments you’ll make. In this case you’ll need to talk to your student loan servicer about extending your term or refinancing.

There are lots of great options available if you want to go this route. Earnest is one of our favorite lenders right now they provide some of the lowest refinancing rates available, and their application process is quick and easy.

Another route you have available is through a company like Credible , which scours the lending marketplace and presents you with the best terms available for your specific student loan needs.

Disclosure: To check the rates and terms you qualify for, Credible or our partner lender(s) conduct a soft credit pull that will not affect your credit score. However, when you apply for credit, your full credit report from one or more consumer reporting agencies will be requested, which is considered a hard credit pull and will affect your credit.

Obviously, these options are not ideal because they’ll cost you more money in interest in the long-run. But, if your goals include repaying your student loans in 10 years but also buying a home now, you can extend the term of your loan repayment, buy the house, and then resume making extra monthly payments towards your loans so they’re paid off according to the regular schedule.

## Finally, enjoy some money now

One final, if a controversial piece of advice: One good reason not to get overzealous repaying student loans early is to enjoy some money now. Most of us will have more money as we get older thanks to rising salaries and savings we build up over time. Of course, you won’t be young forever. One of life’s cruel jokes is that when you’re young and active you have no money and when you’re old you have money but less vitality.

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