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Should you invest or pay off debt?

By WTOP Staff

Tough decisions

It’s a common dilemma: You have to pay off debt, but you also want to make headway with your investing goals. Which should come first? You’ll win either way, so your decision is really about how to win faster. Here is some advice from financial experts to help you formulate a strategy.

Compound interest vs. a healthy credit score

If you pay off debt first, you will lose the power of compound interest on the investments you could have made with that money. But if you invest first, you will be stuck with managing the debt, paying high interest rates and making sure you don’t invoke unintended consequences, such as undermining your credit score by only paying the minimum balances.

Triage your debt.

Organize consumer debt accounts according to their interest rates so you can see which are costing you the most, says Paul Heising, a financial advisor with Smarter Decisions, an investment management firm based in Torrance, California. Pay back loans with the highest interest rates first, especially if those rates are over 10 percent annually, he says. If you have multiple consumer loans, double down on one with a low balance so you can get an early win by closing it out.

Student debt is a special case.

Lance Riddle, a principal with OptimalFolios, a financial planning firm in Dallas, says student debt is more insidious for people nearing retirement. He often advises those in their 20s to start investing before paying off their low-interest student debt, but he recommends the opposite for parents and grandparents who have taken out education loans for their children and grandchildren. “Wipe that [debt] out,” he says.

Take advantage of your 401(k).

Meanwhile, gain traction with investing through your 401(k) plan at work. Set aside the maximum to win the employer match, even if that means it takes a little longer to pay down your debt. “If you don’t take advantage of the match, you are losing the advantage of time,” says Brad Duerson, professor of personal finance and economics at Des Moines Area Community College in Iowa.

When will you see progress?

How much of a difference will it make if you pay off your debt early? Explore the “what if” scenarios with this Bankrate.com calculator. You can play with both the amount you pay monthly and the time frame to see what it would take to pay off a card balance early. Line up both the interest rate on your debts and the expected return on your investments with this CalcXML calculator.

Know your tipping point.

How much consumer debt is too much? “The tipping point is different for each individual,” Heising says. He advises clients with high levels of debt to add up not what they owe, but the total interest they are paying on consumer debt each year. “When I show a client the total interest alone on their credit cards, of say $5,000, that’s over $400 a month just to maintain the debt,” Heising says.

Make it real.

Compare the amount you pay in debt interest alone each month with the amount you spend on another household finance category, such as food, clothes or entertainment. This exercise shows what you could buy with just the interest you are shelling out, Heising says. For many people, this comparison converts the fuzzy debt problem to real things they don’t have — and it can be highly motivating, he says.

How much is too much?

Individual tolerances vary, Heising says, but it helps to think like a lender. It’s not how much you owe in total that causes a problem — it’s how much consumer debt you owe compared with your total credit limit. He advises adding up the total amount of debt on consumer accounts, then comparing that with the total credit limit on those accounts. If you owe upward of a third of the total credit limit, your credit score is probably suffering.

Bonus: Either way, you will build good financial habits.

Duerson points out that paying off debt is satisfying on its own. Once you’ve paid off those accounts, continue setting aside the same amount each month — but for investing instead of debt repayment. Establishing an automatic savings habit is one of the most difficult and important tactics to building wealth — and you’ll have done it.

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Should You Invest or Pay Off Debt? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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