Pay off student loans or invest? Here's how you can decide

Consumers should focus on paying down their student loans and credit cards. (iStock)

The coronavirus pandemic forced many businesses to shutter their doors, resulting in millions of Americans losing their jobs and tapping into their savings as their unemployment funds ran dry. 

Almost one of every five American workers remain jobless and at least 29 million people are receiving unemployment benefits. Amid economic uncertainty, consumers are evaluating their various types of debt, financial priorities, and determining how to pay off debt faster.

Consumers are considering whether they should use their stimulus check to pay off debt — like student loans — or invest in hopes of gaining some extra money in the long run. 

Should you pay off student loans or invest?

Both paying off student loans and investing are important. But how do you decide whether to pay student loans or invest? There are some important factors to consider, including:

  • Interest rates
  • Refinance rates
  • Tax deductions
  • Financial goals
  • Timing

Interest rates

Paying off student loans fast is important, especially if you are facing high-interest rates. When you have other debt (such as credit cards) refinancing, or paying those down means you can free up extra money for your student loans and give you some peace of mind.

With Credible, you can see what interest rates are currently available for all of the above. For example, to check student loan refinancing rates, you can just enter your current loan amount and estimated credit score to compare prequalified refinancing rates from up to 10 lenders. 


Making extra payments, via income from a stimulus check or tax refund, helps people reach their payoff date sooner. Consumers can focus on paying private student loans first since the interest rates can be higher. 

With Credible, you can also find out what student loan refinance rates you personally qualify for today and determine how much you can save on your monthly payments.

Knocking $1,200 off your student loan balance from a stimulus check is progress toward retiring that debt, said Michael Branham, a senior financial planner at the Planning Center in Anchorage.

“That will reduce the amount of interest you’ll pay over the life of the loan,” he added.

You should always examine interest rates before making a decision to pay off debt or invest extra income.

Returns in the stock market are not guaranteed while student loan interest rates range from 2.75% for federal loans to 5.3% for graduate students who took out Direct PLUS loans. Use an online calculator to determine if paying down student loans or investing in a retirement account yields better returns.

Refinance rates

Refinancing private student loans is another option. Compare rates for variable and fixed-rate private student loans. Another way to make progress is to sign up for autopay, which “not only helps you not miss a payment but may get you a reduction in the interest rate,” said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief.

Online marketplace Credible can help you compare student loan refinance options from multiple lenders and find the best rates currently available without impacting your credit score. A snapshot of fixed-interest and variable rates on Credible has rates ranging from as low as 1.99% to 4.54%.


Use an online student loan refinancing calculator. Interest rates for student loans tend to be lower than credit card debt, so making extra payments depends on the balance of your debt, Branham said.

Tax deductions

People who have a manageable amount of student loan debt could allocate some money to a 401(k) plan or individual retirement account. These contributions are tax-deductible and lower your tax bill. 

“People should be lauded for paying down student loans,” said Robert Johnson, a finance professor at Creighton University in Omaha, Nebraska. “However, making that the only financial priority is misguided.”

Consumers saddled with credit card debt that carries higher interest can use their stimulus check to pay down the balance faster. Paying more than the minimum amount and making extra payments means you pay down the principal amount faster. 

Another option is to open a balance transfer credit card with a lower interest rate. Visit an online marketplace like Credible to view multiple balance transfer credit card options at once.

Personal loans are another option because the interest rates are lower than credit cards. Explore personal loan options by visiting Credible to compare loan rates and lenders


Financial goals

The stock market has been booming, but there are no guarantees on future returns. If your priority is maintaining your personal finance (risk-free), then worry about paying down debt first.

Consumers with a large balance on student loans should pay them down since it lowers their monthly expenses in case of a job loss. Paying the loans on a biweekly schedule means you make 26 payments annually instead of once a month.

“Worry about investing when your debt is taken care of,” said Blake Spencer, managing director, business development of The Pinnacle Financial Group in Rockville Centre, N.Y. “Investing isn’t guaranteed to appreciate and if you lose money, you are worse off than before having a stimulus check.” 

Investors should put a few hundred dollars into a retirement account monthly. They can begin long-term investing by starting small and increasing their monthly amounts as they earn more money, said Branham.


People can start saving for retirement by investing in low-fee, broadly diversified stock index funds through a provider. Online discount brokers do not charge commissions for buying and selling individual stocks.

Invest money only if you established an emergency fund of three to six months worth of expenses, said Lamar Watson, a financial planner and founder of Dream Financial Planning in Reston, Va. 

“Investing in the market carries considerable risk and you could lose your initial investment,” he said.


Younger workers have time to aggressively pay off credit card debt and can hold off investing for a year or two, said Travis Gatzemeier, founder of Kinetix Financial Planning in Flower Mound, Texas.

“Those years you sacrifice to be debt-free won't matter much in 30 years,” he said. “Reducing or eliminating credit card debt can lift a huge emotional weight off your shoulders. The sooner this debt is off your plate, the sooner you can give your savings and investments a boost to build future wealth.”