The holidays are upon us and although 2020 isn’t a traditional year people are still getting into the holiday spirits. Gifts have become a huge part of the holidays, which we all know can add a lot of additional stress. This year there is the added stress of what is the best way to get gifts to loved ones? Shipping can be expensive and you risk packages getting delayed, lost, or broken so I wouldn’t be surprised to see more monetary gifts be given.
If you are the recipient of a cash gift and are in high school or college you can use this money to help fund college expenses. Yeah, it’s not exactly a “fun” use of the money but it’s a great opportunity to get a jump start on your finances. While this extra cash may not pay much of your tuition it can certainly help reduce the amount of excess student loans or credit card debt you may have to take on to fund living expenses during college. An added benefit is that I’m sure whomever gave you the money would be happy to know it’s being put to such great use.
Maybe you already have your college living expenses covered by cash flow but you have student loans. If that’s you, you could use the cash gifts to pay down your student loans. There are a couple potential benefits of paying down your student loans while still in school.
The first benefit is it can help reduce your monthly payment once you graduate. If you are on the standard 10 year repayment plan they typically take your outstanding balance when your loans go into repayment and calculate your monthly payment as 1% of the outstanding balance. For example, if you have $50,000 of student loans your monthly payment will be around $500. Now say that over 4 years of college you’re able to pay down $2,000 of your student loan. Your new monthly payment when you graduate with $48,000 of student loans should be $480. The $20 difference doesn’t sound like a lot, but it does add up.
The second benefit is a savings of interest. Once your student loans go into repayment a portion of your student loan payment is interest. If you can reduce the balance of your loans a smaller amount of your payment will be interest, because it’s a percentage of your balance. While the interest savings might be small it’s worth considering.
Please note that the two benefits listed above are mainly for borrowers who plan on paying back their student loans in full instead of using a student loan forgiveness strategy. However, if you’re going for a student loan forgiveness strategy on your federal student loans you could still take advantage of these benefits on your private loans.
As we enjoy the holidays remember that it’s not about the gifts, but it’s about the time we spend with friends and family, even if it’s virtually. We wish you safe and happy holidays!