If you’re in this boat, you may be itching to pay down that debt as soon as possible so you can start investing. But that may not be the best move.
Check out the pros and cons of both options below.
Option 1: Paying off your student loans first
Historically, the stock market would net you around 10 percent in annual returns, but according to investment brokerage Charles Schwab, the next decade or so won’t be as fruitful. A recent report from the company shows that expected returns on large-capitalization stocks will come in at around 6 percent this year and small-cap ones just under 7 percent.
If your student loans have interest rates higher than this 6-to-7 percent range, then you’re paying more in interest than you’d probably earn by investing. Therefore, paying off your loans should probably come first.
Keep in mind that investment returns aren’t guaranteed, and they vary greatly depending on your skills as an investor, how much money you invest, and your stomach for risk. Be prepared for a little learning curve or commit to paying a broker for help if you go the investment route.
It may also be a good idea to pay off your debt first if:
- You have private student loans, as these have higher interest rates and fewer perks than federal loans do.
- Your balances are low, and paying them off quickly would be relatively easy.
- You have a steady income and can afford to make extra payments.
In the event you do want to pay off your loans, be careful about using savings to do it. You should always have an emergency fund just to be safe.
Option 2: Investing your money first
If your student loans have interest rates lower than 6 to 7 percent, investing your money may be a sounder choice than paying down your loans. You should first make sure to max out any matching policy your employer might offer for 401(k) contributions, and then invest any extra cash after that.
Investing may also be a smart move if:
- You have federal student loans, which have low interest rates and a number of perks (like forbearance, for example).
- You’re eligible for an income-based repayment plan or public student loan forgiveness.
- You’re willing to refinance your student loans, which could lower your interest rate and monthly payment.
- You don’t have anything saved up for retirement yet and need a good kickstart.
If you’re new to investing, your best bet is to contact a brokerage or use a roboadvisor like Betterment or Wealthfront. There are also investing apps like Robinhood that can help make investing stocks, bonds and other assets easier.HOW TO ESTIMATE YOUR STUDENT LOAN PAYMENTS
How to pay off your student loans faster
Whether you pay off your loans now or later, one thing’s for certain: You’ll have to do it someday. If you want to speed up that timeline, commit any future windfalls to the cause. Use your extra funds like tax refunds, holiday bonuses and birthday money as additional payments, and consider making bi-weekly payments instead of monthly ones. This can drive down that principal balance even further.
Another strategy? Set up autopay. Many lenders will reward autopay customers with an interest rate discount, which offers serious savings over time.
Also, don’t forget: If you have federal student loans and work in a public service career, you can have your student loans forgiven. There are also income-based repayment plans, deferment and forbearance options that can help if you’re in a financial bind.
The bottom line
Deciding whether to pay off your loans or invest first is a big decision. Before choosing which route you’ll take, have a good handle on your household income and expenses, and know what types of loans you’re working with (as well as their balances). You should also consider refinancing your loans as an alternative to paying them off early, as it could lower your payments and make both repayment and investing easier in the long run.