Investing Or Paying Off Student Loans

We asked a bunch of different financial experts to share their opinions on this topic in an attempt to get closer to the truth.

Paying off student loans is like a guaranteed return.

Paying off student loans is like a guaranteed return.

The interest rate on federal student loans is currently fixed at 4.45% for the life of the loan, and it’s indexed to inflation. Compare this to other investment options like CDs (1%), savings accounts (0.01%) and stocks (-5% or more). You can’t lose! The longer you keep your money in student loans, the higher your effective return will be. For example: If you invest $10K and make 5%, after 10 years you’ll have $11,000; but if you invest that same amount into federal student loans at 4.45%, they’ll pay off after 10 years and leave you with an additional $2300—that’s a 220% increase!

If you’re investing, you need to be patient.

“If you invest, you need to be patient.”

You probably already know that investing has a long-term payoff. If you invest in the stock market and don’t intend to sell your stocks anytime soon, then it may be worth waiting until later on in life when you have more money saved up before starting to make large investments. The reason for this is because as money grows over time through compound interest (which means interest on top of interest), each dollar becomes worth more than a dollar earned from making payments on debt.

The longer you wait, the better off your portfolio will be—and the more money can go toward retirement rather than student loans!

Don’t overestimate your tolerance for risk.

Don’t overestimate your tolerance for risk.

As a general rule, the more you can afford to lose, the more risk you can take on. If you’re young and have plenty of time before retirement and want to make some big bucks in a few years, then it makes sense to take on more risk than if you are older and farther away from retirement and have less flexibility in terms of spending down assets.

If you aren’t putting at least 20% down on a home, keep paying off your loans.

If you have student loans and are thinking about buying a house, consider the following.

• You should be able to afford the monthly payments on your home. If you cannot afford these payments, then it’s better not to buy a house until your student loans are paid off and you are saving up for a down payment.
• You should be able to pay off the loan within 10 years (or less). The faster that you can pay off your student loan debt, the better it is for your overall financial situation—this will help keep interest rates low and prevent any unnecessary penalties from occurring due to late payments or missed payments.
• Try getting at least 20% of down payment saved up before purchasing a new home. This way if anything were ever happen while living in this house (fire damage/flooding etc.), there would still be plenty of equity left in order for repairs or improvements needed done before moving into another home again – thus avoiding any potential foreclosure issues later down line.”

If you’re contributing enough to your retirement accounts to get the full employer match, consider paying down some of your student loans first.

If you’re contributing enough to your retirement accounts to get the full employer match, consider paying down some of your student loans first.

If you are not contributing enough to your retirement accounts to get the full employer match, consider paying down some of your student loans first.

Take advantage of company perks.

If you’re looking to invest, look for a company with a 401(k) match. The amount of the match can vary from 50 percent of the first 6 percent you contribute to all of it. That’s free money!

Once you’re invested in your 401(k), consider contributing to other tax-advantaged savings accounts like Roth IRAs and traditional IRAs.

If your employer offers automatic payroll deductions for these accounts, take advantage of that too! You’ll save time and money by not having to write a check every month.

And that means there’s no right answer for everyone.

There is no right answer for everyone. You need to consider your situation, goals and tolerance for risk before making a decision about what you should do with your student loans.

• Tolerance for Complexity: If the idea of paying off student loans seems overwhelming and complicated, consider investing instead. Betterment and Wealthfront have made investing easy and accessible to almost everyone, so they may work better if you’d rather not deal with all the minutiae of student loan repayment (though I think this is worth it!).
• Tolerance for Patience: Student loan interest rates are going up as we speak! If you want to invest in stocks or ETFs (Exchange Traded Funds), it could take several years before those investments start making money—and even then there’s no guarantee that they’ll outperform your debt-reduction plan by enough to make up for lost time. Investing can be risky too; the stock market has its ups and downs, which makes it hard to predict when exactly you’ll see returns from any given investment vehicle ____

You need to make the decision that is right for you. The question of whether or not to pay off your student loans is a complicated one, and there’s no right answer for everyone. If you’re struggling with the decision, take some time to consider these points before making your choice: