Why I Cashed Out a Mutual Fund and Paid Off My Federal Student Loan
It is very important to perform a little homework before you set out to invest if you don’t want to make the last minute decision of cashing out your mutual fund and wiping out your federal student loan. While there are advantages attached to both and many people can’t find a way out without opting for either one or both of the options, there are various disadvantages that you must give another thought to.
The following are the disadvantages of mutual funds:
While mutual funds are government regulated, the losses incurred are not insured. The Federal Deposit Insurance Corporation (FDIC) only provides insurance for mutual fund losses. Although mutual funds provide risk-reducing diversification advantages, it is possible to incur losses that may even cost you the entire investment.
Expenses and Fees
Many mutual funds charge operating and management fees to carry out the management expenses of the fund. The figure usually falls between 1.0% and 1.5% per year for managing funds effectively. Additionally, some funds also charge redemption fees, 12b-1 fees and sales commissions. And certain funds trade and buy shares so regularly that the cost of transactions accumulate significantly.
Like various other investments, mutual funds do not offer guaranteed return. There is a risk that your mutual funds’ value will decline with time. Unlike products of fixed income, such as Treasury bills and bonds, the price fluctuation is greatly experienced by mutual funds along with the stocks.
A very important aspect of consideration is that mutual funds are not guaranteed by the government of the United States. This means that in dissolution case, there is nothing you can expect to get back. This is particularly imperative for investors dealing in money market funds.
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Federal Student loans are another big concern. Before we proceed with the reasons why wiping out federal student loans can be beneficial, let us first identify the types of federal student loans offered by the government. These are listed below:
- Perkins Loan
- Unsubsidized Stafford Loans
- Subsidized Stafford Loans
- Student Loan Consolidation
- Direct PLUS loans for graduates and parents
Alongside the positives, there are a number of drawbacks associated with student loans sponsored by the Government. The federal loans promise lower grace periods and interest rates and no appropriate payback terms or cosigner. The disadvantages are listed below:
To acquire a federal student loan, students are required to provide evidence that verify their financial need in order to get approved. After the long procedure of eligibility, it depends on the judgment of universities to accept the students’ loan qualification. In short, the lending terms of the government sponsored loans are not flexible.
Fixed Interest Rates
All federal student loan follow interest rates respectively. For example, a Perkins loan sponsored by the educational department of the United States has set a fixed interest rate of 5% for the duration of 10 year period for repayment. On the contrary, private loan interest rates can be even lower once approved by the university.
No Bankruptcy Proceedings
It is almost impossible to seek relief for personal bankruptcy to get rid of federal student loans. The only way you appear eligible for such loans is when you are in consent with the ‘undue hardship’ of loan bankruptcy. In a nutshell, student loan bankruptcy sponsored by the government is extremely severe and impossible to attain.
When you opt for a federal student loan, you are trapped with a long term loan. Education requires that you borrow a lot of money, which usually stresses you with endless financial implications in the future.
Pay off private loans and cash out mutual funds to save yourself from the financial implications that will stress you out in future. Young people usually find it frustrating to spend all their hard-earned money paying back the loan and interest they spend on education.
Also, check out your options when considering cashing out a mutual fund. You will find great information about different procedures on the internet.