The First Steps of Starting a Business

August 26, 2016

Many people go to college with the end goal of landing a job in their field. They may dream of working for a successful business, becoming a teacher in a large school system, or caring for patients in a well-known hospital. These are vastly different careers, but they have one thing in common – they all involve working for someone else. Often, the idea of starting a new business does not occur to college students and young professionals. The notion of being one’s own boss may sound a little far-fetched to students who, due to the uncertain times, are aiming for more practical jobs. However, your younger years may be the prime time to start a business. In your early to mid-twenties, you likely have no mortgage, no children, and more free time to dedicate to your blooming business. In addition, the explosion of the internet has made starting a business easier than ever. The barrier for entry has never been lower. If starting a business at your age is feasible, and you have the drive to pursue a great idea and be your own boss, nothing can stop you. Follow the steps below to learn how to begin the process of starting your own business.

Updated June 03, 2020

Come Up with an Idea

The first step in setting up your own business is to determine how you will generate revenue. Is your business built on products or services? Is your idea unique or will you be entering a highly competitive market? Don’t be afraid to iterate on another idea. The important thing is being able to improve on it. The key to consistently coming up with good ideas is to not worry about them failing. If a good idea is one in a thousand, you’ll have to go through each of the ideas to reach it. When you arrive at an idea you like, take it to your friends and family. Don’t be afraid of the feedback. It will only help you make your idea stronger. If your idea doesn’t stand up to scrutiny, it’s back to the drawing board. There’s no shame in the process of improving your ideas because at the end of it, you will have something that will put you on the road to success.

Develop a Business Plan

The next step is creating a business plan. A business plan is essentially a plan for your business, and it outlines your goals for the future of your business and how you plan to achieve those goals. It comprises many topics including your basic concept, funding, mission, values, target market, competitor analyses, strategy, and financial projections. Experts claim that a good business plan is key to not only get the business running, but also to plan for the future. Thus it is doubly important that your business plan is effective.

Prepare Yourself Financially

Different businesses have different financial needs, but even the simplest of businesses may be costly to establish. Your business plan will help you assess where you stand financially and figure out an estimate of how much money your business requires. There are two actions you can take to start your business on the right foot — saving money and earning money.

Saving Money

Saving money is an often-overlooked element of setting your business up for success. Many successful entrepreneurs started from scratch and had to make personal financial sacrifices to keep their business afloat. Creating a budget and cutting back on expenses is an effective way to set more money aside for your business. If you are in the process of repaying education loans, consider refinancing your student loans in order to get a lower interest rate. A good way to start is checking out the ELFI student loan refinancing calculator.* There are a number of benefits of refinancing student loans that can make starting your business easier. For additional ideas on how to save money, check out this article.

Earning Money

It can be difficult to drive a profit in the early days of your business. If you do not have the required amount at first (and most people do not), there are several ways to earn it. You can work part-time, while developing your business, to yield some extra cash. A side hustle can fill your funding gap. You can ask for financial support from your friends and family or set up a page on a crowdfunding site such as Kickstarter™. Another option is getting in touch with investors that may give you financial support in exchange for stock in the company. You can also take out a loan from a bank or government agencies such as the Small Business Administration, which lends money to help entrepreneurs grow their businesses.

These three steps are not the only elements in creating a business, but they are some of the hardest and most important. Giving them proper attention ensures that your business has the best chances to succeed. Along with ideas, business plans, financial and legal factors, marketing, and more, starting a business requires risk-taking, passion, and hard work. It is not easy, but it is exciting, dynamic, and often worth the risk.

Can You Use a Credit Card to Pay Student Loans?

Unfortunately, making monthly student loan payments with your credit card isn't an option. The U.S. Department of the Treasury does not allow federal student loan servicers to accept credit cards as a payment method for monthly loan payments. While that restriction doesn’t extend to private student loan companies, you’ll be hard-pressed to find one that will offer it. That said, paying off student loans with a credit card is technically possible through a balance transfer. Many credit cards offer this feature primarily as a way to transfer one credit card balance to another, and if you’re submitting a request directly to your card issuer, that’s typically the only option. However, some card issuers will send customers blank balance transfer checks, which gives you some more flexibility. For example, you can simply write a check to your student loan servicer or lender and send it as payment. Alternatively, you can write a check to yourself, deposit it into your checking account, and make a payment from there. Balance transfer checks often come with introductory 0% APR promotions, which give you some time to pay off the debt interest-free. That said, here are some reasons why you should generally avoid this option:

Once the promotional period ends, your interest rate will jump to your card’s regular APR. The full APR will likely be higher than what your student loans charge.
Balance transfers come with a fee, typically up to 5% of the transfer amount, which eats into your savings.
Credit cards don’t have a set repayment schedule, so it’s easy to get complacent. You may end up paying back that balance at a higher interest rate for years to come.
Credit cards have low minimum payments to encourage customers to carry a balance, which could cause more problems.
You won’t earn credit card rewards on a balance transfer, so you can’t count on that feature to help mitigate the costs.

So if you’re wondering how to pay student loans with a credit card, it is possible. But you’re better off considering other options to pay down your debt faster.

Can You Use a Student Loan to Pay Credit Cards?

If you’re still in school, you may be wondering if it’s possible to use your student loans to pay your credit card bill. Again, technically, yes, it is possible. But there are some things to keep in mind. The Office of Federal Student Aid lists acceptable uses for federal student loans, and private student lenders typically follow the same guidelines. Your loans must be used for the following:

Tuition and fees
Room and board
Textbooks
Supplies and equipment necessary for study
Transportation to and from school
Child care expenses

If you incur any of these expenses with your credit card, you can use student loan money to pay your bill. However, if you’re also using your credit card for expenses that aren’t eligible for student loan use, it’s important to separate those so you aren’t using your loans inappropriately. Also, the Office of Federal Student Aid doesn’t list credit card interest as an eligible expense. So if you’re not paying your bill on time every month and incurring interest, be careful to avoid using your student loan money for those expenses.

How to Pay Down Your Student Loans More Effectively

If you’re looking for a way to potentially save money while paying down your student loans, consider student loan refinancing. This process involves replacing one or more existing student loans with a new one through a private lender like ELFI. Depending on your credit score, income, and other factors, you may be able to qualify for a lower interest rate than what you’re paying on your loans right now. If that happens, you’d not only save money on interest charges, but you could also get a lower monthly payment. Refinancing also gives you some flexibility with your monthly payments and repayment goal. For example, if you can afford to pay more and want to eliminate your debt faster, you can opt for a shorter repayment schedule than the standard 10-year repayment plan. Alternatively, if you’re struggling to keep up with your payments or want to reduce your debt-to-income ratio, you could extend your repayment term to up to 20 or even 25 years, depending on the lender. Keep in mind, though, that different refinance lenders have varying eligibility requirements. Also, just because you qualify, it doesn’t necessarily mean you can get more favorable terms than what you have now. However, if you’re having a hard time getting approved for qualifying for better terms, most lenders will allow you to apply with a creditworthy cosigner to improve your odds of getting what you’re looking for. Before you start the process, however, note that if you have federal loans, refinancing will cause you to lose access to certain programs, including student loan forgiveness and income-driven repayment plans. But if you don’t anticipate needing either of those benefits, it won’t be an issue.

The Bottom Line

If you’re looking for ways to pay off your student loans more effectively, you may have wondered whether you can use your credit cards. While it’s possible, it’s generally not a good idea. Also, if you’re still in school, it’s important to be mindful of how you’re allowed to use your student loan funds, especially when it comes to making credit card payments. A better approach to paying down your student loan debt is through refinancing. Take some time to consider whether refinancing your student loans is right for you, and consider getting prequalified to see whether you can get better terms than what you have on your current loans.

Woman learning how to start investing with student loans

2020-11-27

Should You Save, Invest or Pay Off Student Loans?

One of the questions many students grapple with as they begin life post-college is whether to invest or aggressively pay off their student loans. Figuring out when to start investing can be a complicated issue, especially if you’re worried about how much student loan debt you ended up with after college. The good news is that it’s possible to start investing while paying student loans. However, everyone needs to make a decision based on their own situation and preferences. As you consider your own choices, here’s what to consider when deciding whether to start investing with student loans.

Should I Invest When I Have Student Loan Debt?

When you have student loan debt, it’s tempting to focus on paying that down—just so it isn’t hanging over your head. However, there are some good reasons to invest, even if you’re paying off student loans. The benefits of investing include:

Compounding Returns

The earlier you invest, the longer your portfolio has time to grow. When you invest, you receive compounding returns over time. Even small amounts invested consistently can add up down the road. If you decide to wait until your student loans are paid off before you invest, you could miss out on several years of potential returns.

Tax-Deductible Interest

If you meet the requirements, a portion of your student loan interest might be tax-deductible. If you can get a tax deduction for a portion of your interest to reduce its cost to you, that could be a long-term benefit. It’s not the same as not paying interest at all, but you reduce the negative impact of the interest. For more information about this option, speak with your financial advisor.

Returns on Investment May Exceed What You Pay in Interest

The long-term average return of the S&P 500 is 9.24%. If you qualify for a tax deduction on your student loan interest, you can figure out your effective interest rate using the following formula: Student loan interest rate x [1 - your marginal tax rate] If you fall into the 22% marginal tax bracket and your average student loan interest rate is 6%, you could figure out your rate as follows: 6 x [1 - 0.22] = 4.68% Long-term, the potential return you receive on your investments are likely to offset the interest you pay on your student loans. Don’t forget, too, that if you decide to refinance your student loans, you might be able to get an even lower rate, making the math work out even more in your favor if you decide to invest.

Student Loan Forgiveness

Another reason for investing with student loans is if you plan to apply for forgiveness. If you know that you’re going to have your loans forgiven, rushing to pay them off might not make sense. Whether you’re getting partial student loan forgiveness through a state program for teachers or healthcare workers, or whether you plan to apply for Public Service Loan Forgiveness, you might be better off getting a jump on investing, rather than aggressively tackling your student debt.

A Word of Caution About Investing

While investing can be a great way to build wealth over time, it does come with risk. When paying off student loan debt, you have a guaranteed return—you get rid of that interest. With investing, you aren’t guaranteed that return. However, over time, the stock market has yet to lose. As a result, even though there are some down years, the overall market trends upward. If you don’t have the risk tolerance for investing while you have student loans, or if you want the peace of mind that comes with paying off your debt, you might decide to tackle the student loans first and then invest later.

How to Start Investing

If you decide to start investing while paying student loans, there are some tips to keep in mind as you move forward.

Make at Least Your Minimum Payment

No matter your situation, you need to at least make your minimum payment. You don’t want your student loans to go into default. Depending on your income and situation, you might be able to use income-driven repayment to have a lower payment and then free up more money to invest. Carefully weigh the options to make sure that makes sense for your situation since income-driven repayment can result in paying interest on student loans for a longer period of time.

Decide How Much You Can Invest

Next, figure out how much you can invest. Maybe you would like to pay down your student loan debt while investing. One way to do that is to determine how much extra money you have (on top of your minimum student loan payment) each month to put toward goals like investing and paying down debt. Maybe you decide to put 70% of that toward investing and the other 30% toward paying down your student loans a little faster. There are different ways to divide it up if you still want to make progress on your student loans while investing.

Consider Retirement Accounts

If your job offers a retirement account, that can be a good place to start investing. Your investment comes with tax benefits, so it grows more efficiently over time. Plus, you can have your contributions made automatically from your paycheck, so you don’t have to think about investing each month.

Use Indexing to Start

Many beginning investors worry about how to choose the “right” stocks. One way to get around this is to focus on using index funds and index exchange-traded funds (ETFs). With an index fund or ETF, you can get exposure to a wide swath of the stock market without worrying about picking stocks. This can be one way to get started and take advantage of market growth over time. As you become more comfortable with investing, you can use other strategies to manage your portfolio.

Bottom Line

It’s possible to start investing while paying student loans. In fact, by starting early, you might be able to grow your portfolio for the future even while you work on reducing your student loan debt. Carefully consider your situation and research your options, and then proceed in a way that makes sense for you.

2020-11-13

Can I Use Home Equity to Pay Off Student Loans

It feels great when the work you've put in pays off in multiple ways. Whether it's seeing your blood pressure drop from biking to work or getting a boost to your mood from toiling in the garden, unexpected benefits are always a welcome surprise. So if you're paying off student loans and a mortgage at the same time, you'll probably be interested to hear that you can use the home equity you've already accrued to pay off your student loans even faster. That might sound enticing, but don't start drawing up the paperwork just yet - this strategy doesn't work for everyone. Here's how to use a home equity loan to pay off your student loans, and why you might want to think twice before doing so.

How a Home Equity Loan Works

Borrowers with high interest rates on their student loans can take out a home equity loan and use the proceeds to pay off their student loan balance. A home equity loan lets homeowners withdraw extra equity from their homes to use for any reason, like remodeling the kitchen or paying for a vacation. The money is deposited as a lump sum, and borrowers start making payments on the new loan immediately. Home equity loans usually have fixed monthly payments, and the terms range from five to 15 years. Homeowners need at least 20% equity in the home to take out a home equity loan. This often excludes new borrowers who don't have enough equity yet.

Pros of Using Home Equity to Pay Off Student Loans

Here's how a home equity loan could help you save money:

Could Save on Interest

Interest rates on home equity loans are usually lower than private student loans, which means borrowers can save thousands on interest. As of November 2020, rates on private student loans ranged from 3.82% to 14.50%. Rates on home equity loans are currently between 3.890% and 9%. Let's say you owe $50,000 in student loans with a 10% interest rate and a 10-year term. If you take out a home equity loan for $50,000 with 5% interest and a 15-year term, you'll save $8,118 in total on interest. Your payments will decrease from $660.75 to $395.40 a month.

Could Decrease Your Monthly Payments

If you want more leeway in your budget, paying off your student loan payments with a home equity loan could free up the cash you need. For example, if you have five years left on your student loans and take out a 15-year home equity loan, your monthly payments will decrease. If you owe $40,000 in student loans with 10% interest and five years left, you’ll pay $534 less each month if you get a home equity loan at 5% interest and a 15-year term. You can use that extra cash flow to build up your emergency fund, save toward retirement or spend on other necessities.

Easier to Qualify for a Home Equity Loan

A home equity loan is easier to be approved for than student loan refinancing because it uses the home as collateral. On the flip side, that means you'll need to stay current on both your mortgage and home equity loan in order to avoid losing your home.

Cons of Using Home Equity to Pay Off Student Loans

Taking out a home equity loan to pay off your student loans sounds like a no-brainer, but there are some huge risks.

Can’t Deduct the Interest

Before the Tax Cuts and Jobs Act of 2017, homeowners who took out home equity loans could deduct the interest on their taxes. The TCJA changed the rules so only homeowners who use the funds to repair, remodel or add to their homes can deduct the home equity loan interest. This means there are no tax benefits to taking out a home equity loan to pay off your student loans. However, borrowers may be able to deduct student loan interest on their taxes. Married couples can only take the student loan interest deduction if they file taxes jointly and have a modified adjusted gross income (MAGI) below $140,000. Individuals may be able to deduct student loan interest if their MAGI is below $70,000. Please note, you should consult a tax advisor about your specific circumstances.

Risk of Losing Your Home

When you take out a home equity loan, the home is used as collateral for the loan. If you default on a home equity loan, the bank can repossess your house. The risks are much lower for student loans. If you default on student loans, the lender can't take away your property or rescind your degree.

Lose Student Loan Benefits

If you pay off federal student loans with a home equity loan, you lose access to federal benefits and protections. These include income-driven repayment plans, deferment and forbearance.

Could Become Underwater on Your Home

If home prices in your area drop significantly, you could end up underwater on your mortgage. This means that your home will be worth less than the remaining loan balance. Being underwater makes it impossible to refinance your mortgage or sell the house, because the sale price won't make up for the loan balance.

Will Have to Pay Closing Costs

You'll have to pay closing costs on a home equity loan, usually between 2 to 5% of the loan. In this way, a home equity loan is similar to a mortgage refinance. If your home equity loan is $25,000, for instance, you'll pay between $500 and $1,250 in closing costs. Sometimes you can roll these closing costs into the mortgage, but you'll often have to pay them upfront. Lenders don’t charge closing costs on student loan refinances.

What to Do Instead

Instead of taking out a home equity loan, you may be better off refinancing your student loans to a lower interest rate. Refinancing student loans lets you save on interest without putting your home down as collateral. To see if you qualify for student loan refinancing, contact an ELFI representative today. They can go over the steps and see if you qualify.