Pay Off Student Loans Or Invest? Here’s The Math!

4 min read

pay off student loans or invest


There is no mistaking that there is a huge student loan crisis happening right now. Statistically, there is over 1.4 trillion dollars of student loan debt out there. Having such a huge debt burden can really slow down a person’s financial goals. It’s no wonder then that so many asked whether they should pay off their student loans first or invest.

Although you always hear that paying off your debts should be the only thing that you do before you even start investing, that might be true for certain scenarios, but not true for others.

Like with anything relating to personal finance, there is no one answer. It really depends on a person’s situation. We’re going to take a closer look at what to consider when deciding whether you should pay off student loans or invest first.

Paying off student loans first

If we take a look at the Historical returns off investing in the stock market, they typically yield a 6 to 7% return. If you take a look at your student loans and your interest rate is higher than 6 to 7%, then you are probably paying more in interest than you would have invested.

In this case, it definitely makes more financial sense to pay off your student loans first before you invest. If your student loan interest is higher than how much are investments earn in a year, then you will end up losing money.

Another thing to remember is your skill level when it comes to investing. If you are a beginner and just starting to invest, then your Investments might actually yield less than the average 6 to 7%.

On the other hand, if you are much more skilled in investing, your yield might be even greater. However, it has been proven time and time again that no matter how skilled you are, you’re probably never going to beat the average in the long run.

Pay off student loans if you have a high income

If your income allows it, then it definitely makes sense to go ahead and pay extra towards your student loans. This is especially true if you have a high-interest rate. If you can afford to, then go ahead and throw extra money at it so you can get it over and done with quicker.

Pay off private student loans

If you have private student loans, then chances are you have a bit of a higher interest rate. If you have this kind of student loan, then you’ll probably be better off paying it off first. They don’t come with the flexibility and lower interest rates than federal student loans do.

Click here to get the best student loans refinancing rates

Pay off low balances

If you have low student loan balances, then you might as well go ahead and pay those off. These won’t take too much time to pay off and would be relatively easier to go through.

Invest your money first

As mentioned above, you should take a look at what your student loan interest rates are. If they are below 6 to 7%, then investing your money first my actually work in your favor.

This is because your Investments would beat the interest rate of your student loans. If, for example you had a 3% interest rate on your student loans, then investing your money with a 6 to 7% return would yield you more money in the long run.

Again, it’s important to consider your skill level when it comes to investing. Remember, returns are never guaranteed so always proceed with caution.

Consider Investing if you have federal student loans

The great thing about having federal student loans is that they come with some perks. They typically have very low-interest rates and options like forbearance and student loan forgiveness. In this case, it might make sense to take advantage of these perks and invest your money for a better return.

Consider investing if you can refinance for a better interest rate

Since your interest rate plays a big part in deciding if you should invest or pay your student loans first, then it’s important to see if you are able to refinance your student loans to lower your rate.

Click to check the latest student loan refinancing rates

If your student loan interest rate is already low, then there’s no need to do this. But, if you have a high-interest rate and want to lower it, refinancing your student loans would probably be your best bet. If you can refinance to a lower interest rate, then investing your money instead might be a good strategy.

Consider investing if you have a very high student loan balance

If you have a very high student loan balance then paying it out first might not be a good strategy. If you, for example have $100,000 or more in student loans, but have a $30,000 salary, you will miss out on much better uses of your money.

In this scenario, you should likely work towards figuring out how to get your student loans forgiven. I wrote an extensive article going through ways you can get your student loans forgiven. This only applies if you have federal student loans.

Always fund your retirement first

All right, now that we’ve gone through what both of these options looks like, one thing will always stand true. No matter what strategy you pick, always remember to fund your retirement first above all.

An excellent example of this is funding a 401k. If your employer offers a 401k match, always contribute enough to get the match without fail! This is free money that you absolutely cannot let go to waste.

I’ve seen and heard so many people leaving money on the table in opting not to invest in their 401K retirement fund. Future you will thank you, and you will 100% need it when you retire. So no matter what, always remember to fund your retirement first.

Invest and pay off your student loans simultaneously

What if you did both? What if you invested and paid off your student loans at the exact same time? It’s definitely possible, and not as difficult as it sounds.

The thing was investing is that the earlier you start, the better it is in the future. With compounding interest and time, investing as little as a couple of dollars a day can turn into tens of thousands of dollars in a few years.

Invest spare change using Acorns

An excellent app that you can use to invest is Acorns. Acorns allows you to invest your spare change and actually watch it grow. This is an excellent app to use especially as a beginner.

If you are working through your student loans, but also don’t want to start investing too late, this is a really great and affordable way to get started with investing!

How Acorn works is that for every purchase that you make, it’s rounded up to the nearest Dollar. So for example, if you buy something for $5.50, it will round up that transaction by 50 Cents, and invests that $0.50 automatically for you. Super easy to set up!

All you have to do is connect your bank accounts and it will do the rest for you. See, you really don’t need that much money to get started investing. Just by investing your spare change, you can better your financial future exponentially!

Final thoughts

As you can see, there are many ways that you can approach this. There are a few things that you will need to consider before picking which option best suits you. Everyone’s financial picture is different.

On the other hand, you could always just do both simultaneously. Pay off student loans and invest at the same time with apps like Acorns.

Investing is a long-term strategy. It takes time and patience. Getting started is the first step, and using an app like acorns allows you to start investing with very little, but slowly grow your Investment Portfolio.

Hope this was helpful, let me know what you think in the comments 🙂

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