If you’re a millennial you may view the Great Recession about the same way as your grandparents viewed the Great Depression. You saw what could happen as a result of one of the biggest financial meltdowns in our history. Given this, it would not be a surprise if you stayed away from the stock market as if it were a patch of poison ivy.
Investing in stocks
Of course, that doesn’t mean you should avoid the stock market entirely. The thing about stocks is that they tend to increase in value because they represent a corporation’s ability to increase value. We humans are continuously finding ways to generate more value. So, unless companies stop finding ways to get that value, stocks are a pretty darn good investment over the long haul. And since you’re young, this would be a good time to buy stocks, as you will have many years to see them grow in value.
Investing in a house
One alternative to investing in the stock market is to buy a house. After all, isn’t homeownership the great American dream? Unfortunately, it isn’t a really great investment. When you own a home, this leaves you vulnerable if you were to get fired, see your income reduced or your home nosedive in value. Home ownership is really an investment that keeps you stuck geographically and is undiversified, meaning you’ve put all your precious eggs in a single basket..
A better alternative
A third way to invest that can be great for millennials and represents an even better option than investing in stocks or buying a house is paying off your student loans. If you’re a typical millennial you have a huge amount of student debt. Much of your debt probably has a surprisingly high interest rate. For example, the interest rate on the cheapest type of federal student loan is now 4.66%. On the other hand, the most expensive type of loans, Direct PLUS loans, have an interest rate of 7.21%.
When you compare this to the 17%, 19% or even more you’re paying on your credit cards this may not seem very high. But keep in mind that a 30-year treasury bond has a yield or return of only about 3%.
The best way to think about paying down a student loan is as in investment. It’s really the same as buying bonds or stocks. If you have a student loan where the interest rate is 7% and you pay down $1000 of it, you’ve basically gotten a 7% return on your investment.
Comparing this with stocks
The biggest problem with investing in stocks is the way the stock market swings as its typically bigger than what’s called its average return. If you invest in stocks and they plummet, as occasionally happens, and you need to sell quickly – you might take a huge loss. And it just isn’t true that stocks always bounce back.
Paying down student loans is risk-free
In comparison, there is no risk if you pay down your student loans and they offer a better return than you could get with stocks. Of course, there could always be a change in interest rates. If they were to increase a great deal, then 4.66% or 7.21% could look very cheap. Plus, if inflation were to suddenly occur it could reduce the value of your student debt. This means if you were to prepay your loans you could end up looking like a fool. Of course, these possibilities are fairly unlikely. Right now there is not a single sign of inflation, it appears that interest rates will remain where they are for quite some time and the idea of student loans suddenly being forgiven is clearly much more of a myth that a reality. So, if you are a millennial and struggling to repay your student loans, then paying them down is probably a much better investment than putting your money in stocks.
There are a variety of ways to pay down those loans. Unfortunately, the best and quickest one is probably to take on a second job or a second shift where you work. Or maybe your partner could go to work. There seem to now be a large number of part-time jobs available. While they usually pay only $9 or $10 an hour, you could work 20 hours a week and earn somewhere around $600 a month after taxes. Apply all that money to pay down your student loans and you might be able to become debt free in just five years or even fewer.
If a part-time job isn’t your cup of tea there are other ways to increase your earnings. We know of one young woman who has completely paid off her credit cards selling weight loss products in her spare time. Many people have earned extra money to pay off their student loans by selling stuff on eBay. If you’re into vintage or handcrafted items, the website Etsy could be a good place to earn extra money. Sometimes the best solution is to think outside the box. We know of one woman who spent a year couch hopping from apartment to apartment and saved enough in rent to pay off her student debts. Another lived and taught abroad in a nation that has a much cheaper cost of living than the US. She was able to save enough to completely pay off her student loans in just three years. Plus, she had the fun and experience of living in a foreign country. There is also the story of the graduate student at Duke who lived in his van for a year. While that might not appeal to you a little thinking outside box like this and you could get your student loans paid down in no time at all.
Cancellation and forgiveness
If you join the National Guard you could earn up to $10,000 to pay off your student loans. Volunteer for the Peace Corps and you could get deferment on your federal student loans and your Perkins Loans partially canceled. The way this works is you would get 15% cancelled for each year of service up to 70%. So, serve in the Peace Corps for three years and you could get 45% of your Perkins loans canceled. You could also earn a stipend of $4725 to pay down your loans by serving in AmeriCorps or Volunteers In Service to America (Vista). If you have the credentials necessary to teach and are willing to teach in a low-income school you could earn loan forgiveness. The way this works is that you must make 120 on time payments after which time any of your remaining balances would be forgiven.
You could also earn loan forgiveness by working in the public sector. There is a program called Public Service Loan Forgiveness. You could have almost any kind of job so long as you were working for a federal, state or local government or a non-profit organization recognized as a 501(3)(c) by the IRS. Make 120 qualified on-time payments and just as is the case with teacher loan forgiveness any of your remaining balances would be forgiven.