College can be a time of educational exploration and deciding what you want to do with your professional life. For many students, the enormous amount of student loan debt will be a constant reminder of their time in class—and something that needs to be managed with that first real paycheck. The average amount of student loan debt total per person is $31,172, with an average monthly student loan payment of $393.
Student loan debt may seem like a young person’s game, but consider this: Many Americans pay student loan debt even after they’ve retired. The current outstanding student debt for borrowers 62 and older is $67.8 billion. Typically, people over 62 are taking out loans or cosigning on a loan for a child or grandchild.
A report by the Association of Young Americans (AYA) and AARP, showed that 31% of baby boomers, ages 54 to 72, were forced to stop saving for retirement in order to pay off student loans.
When looking at how long you’ll be saddled with student loan debt, the answer depends on a number of factors, including repayment terms, loan type, and more. Federal student loans, provided by the government, offer a standard repayment plan that allows borrowers up to ten years to pay off their debt. Graduated repayment plans for federal student loans give borrowers 30 years.
Repayment terms for private student loans vary, but ten years is most common.
Investing with student loans
Before you begin investing, you need to assess if it’s an option for you. First, review your debt situation and the attached interest rates.
When you pay off debt, you eliminate the interest expense. During the time you make debt payments, you sacrifice interest income that you could have earned if you had invested the same amount. However, once you pay off the debt, you can begin to earn interest income on the money you would have spent each month on debt payments.
There’s a quick method to determine if you should focus on investing or debt payoff. If the interest rate on your debt is lower than a conservative estimated return on your portfolio, focus on investing. If the interest rate on your debt is higher than that conservative return, focus on paying off the debt. To get an idea of the types of return you can expect, take a look at a few different investments and their averages.
Beyond those calculations, consider if you have enough money to put toward investments. A budget is a great strategy for allocating your income toward living expenses, debt payoff, and investments. A popular budgeting method uses the 50/30/20 Rule.
The 50/30/20 Rule is simple to employ, and you start by calculating your after-tax income. If you work a traditional job and have your taxes removed from each paycheck, this one is simple. Add up what’s deposited into your bank each month. If you are freelancing, take 30% off the top of what you earn each month to account for your self-pay taxes. If your income is of an unpredictable nature, review the last six months of your earnings and average them out.
Half of your income should be in the “needs” category. Needs are those bills that you unquestionably, absolutely must pay and are necessary for your survival and are mostly fixed costs. These include rent or mortgage payments, groceries, health care, minimum debt payments, and utilities.
Thirty percent of your income should be in the “wants” category. This is the number one area where most people overspend and it’s so easy to do it. Anything in the “wants” category is optional when you boil it down.
Twenty percent of your income should be allocated toward savings and investments. Funding your emergency accounts, investing in the stock market or mutual funds, and contributing to your IRA all count here. Emergency savings accounts should either be in place or in progress before you begin investing.
Starting a mini-emergency fund of around $500 to $1,500 is the first step in establishing a fully stocked emergency fund. This smaller goal will bolster your confidence and go a long way in protecting you from life’s little problems. Because you have this safety net in place, a flat tire won’t cause you to whip out your credit card and go into debt. It’s not just peace of mind, it’s good business.
Outline your goals
Once you’ve determined that you’re ready to invest it’s time to set some goals. A great exercise involved you, a pen, and paper. Look at Future You while focusing on the big moments that come with a big price tag. Think about how far out those moments are.
Five years out, you might be ready to get married, have your first child, or buy your first home. Ten years later you could have two more kids and a few investment properties. Twenty years down the line could mean college tuition payments. And then what about retirement?
Establishing goals will set the type of investment strategy you run to reach those goals.
Choosing an investment method
Investments made in the stock market, ETFs, or funds may be made in several ways, most traditionally through an IRL broker. You can set up an appointment and bring all your financials to offices all across the country.
Or you could do it all from your couch. Investing platforms like Public can educate you in all matters of investing and when you’re ready to jump in you can buy in without commission fees. Getting a handle on the basics can be a fun and rewarding experience, especially when you’re learning and sharing with friends using the social aspects of the app. The key for beginner investors is to define your objectives at the beginning, do the proper research into which tools and partners will best help you meet your goals, and put time into learning about the public markets and the companies that comprise them.
Online stock purchasing has democratized the market by eliminating the middle-men and reducing the irritation that used to exist in the investing process. With simpler, more intuitive products more people are becoming investors—and doing it with smaller amounts of money.
These platforms have also made it possible for investors to buy portions of a share, or “fractional investing.” Fractional investing is especially suitable to new investors because it lowers the barrier to entry for high-cost stocks such an Amazon, which trades at well over $1,000 per share. With fractional investing, investors of all financial backgrounds can own a piece of companies that might have previously been out of reach to the everyday investor.
Public is one brokerage that offers this type of investing. Through its feature called “slices,” Public users can buy into pieces of the companies they believe in instead of footing the bill for a full share.
Capital gains 101
A capital gain occurs when you sell an investment at a profit. Capital gains can receive favorable tax treatment because the rules generally favor capital gain over ordinary, earned income.
Capital gains are measured by the difference between the amount realized in a sale and the basis on the asset you sold. You pay taxes on the difference.
The best time to invest
There’s no perfectly perfect time to invest and it’s impossible to time. Instead, focus on getting into the game instead of trying to win. Stock investments are a strong strategy for long-term growth. The average returns of investing in the stock market are much higher than with other types of investing, which coincides with risk. A long-term mindset is essential when investing for growth.
To mitigate some risk, consider dollar-cost averaging. Using this method, you can protect yourself from the risk of investing all of your money at the wrong time by following a steady rhythm of funding over a long period of time. By making regular investments with the same amount of money each time, you will buy more of an investment when its price is low and less of the investment when its price is high. This is an especially sound investment strategy in a volatile market.
The bottom line
Everyone’s financial circumstances are unique and there’s no cookie-cutter approach. Understanding your budget and what you’re up against is crucial in making sound decisions. You absolutely can invest as a college student and even with student loan debt. There are products available that lower the barrier to entry into the market and allow you to invest free from fees. By starting your investment journey while you’re still in school, a foundation will be in place to reach your goals down the line.