How to Build Wealth When you’re starting with Student Debt

The gown and cap are put away, the graduation photo is uploaded, and the bitter truth hits. With your diploma is the reminder: student loan payments that are more akin to a mortgage payment than the key to success. If you're one of the 45 million Americans holding student loans, with an average of $37,000 as cited by the Federal Reserve, you may believe building wealth is the exclusive purview of those who began with no debt. The truth, however, is much more encouraging than the news headlines.

It can be done: Many graduates amass wealth with student loan debt each day. They don't allow their loans to dictate their financial destiny. The trick is understanding that becoming rich isn't about ideal situations or unlimited funds. It's being resourceful with what you have, even if it feels minor initially. Graduates who become wealthy amidst student loan debt employ the same tactics that are more than mere rudimentary budgeting advice. They view money, opportunity, and time differently.

The mental hurdle is usually more difficult to pass than the math. When you look at a negative net value in black and white, it is easy to think you have to wait to become wealthy until you owe nothing. This kind of thinking can cost you years of growth and set back your financial goals. Fidelity research indicates that graduates who begin investing even a small amount in their twenties, even if they owe something, do better than those that wait until age thirty to invest debt-free. Time is a very powerful component in accumulating wealth, and owing money does not prevent you from using that time to your benefit.

Student loans are distinct from credit card debt since they carry lower rates and tax savings that can be invested wisely. Federal student loans carry interest of 4% to 7%, which is often less than the long-term historical average returns of most investments. This provides the possibility of what financial advisors call positive arbitrage earning more on investments than you pay in interest on your loans. While this strategy entails smart consideration of risk as well as cash flow, it indicates that owing money does not stop you from becoming wealthy.

The most successful wealth builders with student loans follow a parallel approach, not a sequential one. They don't wait to have their loans eliminated before they start investing; they do both at the same time using a smart juggling of their finances. That can be paying enough into a 401(k) to get an employer match and paying the minimum on low-interest student loans, or paying into a Roth IRA while paying off high interest private loans as aggressively as possible. The exact plan depends on the situation, but the general rule is the same: time beats perfection.

Intelligent Debt Management That Facilitates Wealth Creation:

To accumulate wealth despite student loans, you must make your loans a burden no more but an opportunity in your strategy. This begins with being precisely certain about how much you owe and to whom. Most graduates have outstanding debt to multiple companies with varying interest rates and terms, which is confusing and easy to forget, but poorly managed can cost you money. Taking stock of all your debt federal and private loans, interest rates, payment schedules, and any incentives you enjoy provides you with the plain facts needed to make intelligent decisions.

Federal student loans include repayment terms that can significantly impact your cash flow and wealth creation. Income-driven repayment options can reduce monthly payments to as little as 10% of what you decide to spend, and you can keep more money in your pocket for investments and savings. While longer repayment times mean more interest paid over the life of the loan, more cash flow can enable you to create wealth that covers the additional cost of interest. A graduate who might pay $500 per month on a conventional plan, for example, might reduce payments to $200 with an income-driven plan, leaving $300 per month for investments that can grow a lot over decades.

The key is to view this strategy as a matter of overall wealth and not merely attempting to reduce debt. If new investments earn 7% annually while the student loans earn 5%, the graduate will be richer even if they end up paying more in loan interest. This arithmetic becomes even stronger when we factor in employer matching contributions, tax deferral in retirement investment plans, and the career advancement possibilities that can lead to higher earnings in the long run.

Refinancing is another possibility to explore, but consider it carefully. Private refinancing can lower rates for well-credentialed graduates with stable jobs, saving a lot of money in interest. Refinancing is not a good option if you have federal loans, however, because you'll be sacrificing income-based repayment plans, forbearance, and possible forgiveness opportunities. The choice needs to be part of your overall money plan and how much risk you are willing and able to accept. If you are sure of your future income and want the security of lower payments, refinancing might help you become rich faster. But if you like the flexibility and protection that come with federal loan benefits, keeping federal loans while becoming rich might be a better choice.

Tax planning is vitally crucial when it comes to managing debt and accumulating wealth. The student loan interest deduction allows you to write off up to $2,500 in interest payments annually, reducing the true cost of your debt. At the same time, contributing to traditional retirement plans reduces your taxable income now, while Roth contributions allow you to accumulate tax-free wealth in the future. Employing these tax advantages in tandem can significantly improve your overall financial status. Some graduates realize the tax advantage of retirement contributions pays nearly for their student loans, which in turn allows them to service their debt as well as accumulate their wealth simultaneously.

Developing New Income Streams and Investment Plans:

Wealth creation and accumulation of student debt mean seeking other sources of funds beyond ordinary employment and investments. Graduates who build true wealth and accumulate student debt typically turn to other means of income and intelligent investment methods suitable to their position. This does not involve taking multiple jobs until exhausted, but utilizing intelligent methods of making money that can increase while involving minimal time.

The digital economy has created new avenues for individuals to earn money from their skills, which earlier generations lacked. These are freelance writing, graphic design, tutoring, social media management, online selling of products. The thing that the graduates can do is, leverage what they have learned to earn extra money. The idea is, to select opportunities that align with your career aspirations and have the prospect to grow in the long run. A marketing graduate who begins a freelance social media venture is not only earning extra money they are also building skills and connections that will likely translate into higher-paying jobs or even launch a full-time venture.

Student loan investment strategy is made up of growth potential against risk management and liquidity requirements. The old adages to pay debt first and then invest disregard the opportunity cost of waiting to invest and that debt repayment calls for consistent cash flow independent of investment performance. Wealth builders who succeed have a tiered strategy: emergency fund first, employer match second, high-interest debt third, and other investments fourth. The sequence provides financial security while taking advantage of time-sensitive opportunities such as employer matching and compounding.

Real estate investing is required of graduates who have student loans. Even when it seems impossible to invest in real estate with minimal savings and loans to repay, strategies such as house hacking renting out other units in a multi-unit building while residing in one can enable you to make money and acquire equity simultaneously. Other graduates utilize FHA loans to purchase duplexes with 3.5% down and utilize the funds they receive from renting to repay student loans while accumulating wealth in real estate. This strategy requires a lot of market research and excellent property management skills but can enable you to accumulate wealth much sooner if you are ready to take on an additional workload. Fractional investing and rob-advisors have opened up alternative investments to everyone with low barriers to entry. Graduates can put in as little as $25 per month on platforms that diversify their investments automatically and rebalance their portfolios. Though this may be a small fraction of what they pay per month for student loans, it contributes toward good habits and begins to build wealth immediately. Most importantly, it demonstrates that everyone can invest even on tight budgets, and this emboldens them to invest more as their income rises. Retirement accounts are worth it, even for student borrowers, particularly when employers contribute. A 401(k) match gives a 100% immediate return, which is higher than most debt interest rates. Aside from employer accounts, Roth IRAs provide special advantages for student loan borrowers who are young investors. You can withdraw your contributions penalty-free for first-time home buying, which gives you more flexibility than other investments. The four-decade tax-free growth can result in enormous wealth even with modest contributions. Accumulating wealth using student loans means beginning with what you already have, rather than waiting for the optimal situation that will never appear. Successful graduates possess a growth mindset that identifies their debt as a temporary setback, rather than an impenetrable wall. They focus on making more money, maximizing their assets, and paying off their debt gradually while accumulating wealth. Above all, they know that accumulating wealth is a function of time, not a sprint, and beginning early with student loans is preferable to beginning late without them. The power of time, even in suboptimal circumstances, contains possibilities that waiting for optimal circumstances cannot offer.