Decide Whether to Pay Off Student Loans or Invest.
Pay Off Student Loans or Invest?
One of the most common questions we get at FitBUX is: Should I pay off student loans or invest? This is a complex question because each person’s goals are different.
First & Foremost: The Right Mindset
When deciding if you should pay off student loans or invest, you have to look at how much money is going out of your pocket vs into your pocket.
Pay Off Student Loans or Invest: The Starting Point
The first place to start is determining what student loan repayment plan you are going to be using.
Understanding Risk Vs Return
When you have debt you have an added expense every month. This means that your budget has less flexibility. Also, all investments have different levels of risk vs return.
Get Your Employer Match
Assume you make $70,000 a year and your employer offers a 3% 401k match. This means if you put $2,100 a year into your 401k the company will put in $2,100 a year. THAT IS A 100% RETURN WITH ZERO RISK.
Pay Off Student Loans Or Invest In After-Tax Accounts
If these investments return less than the interest rate on your student loans then it makes more sense to repay your loans rather than invest.
Scenario 1: Pay Off Loans Aggressively
I make 73k per year in salary and I’m going to put 27% of that towards my loans. Therefore, I am going to pay $1,642.50 per month. Then I will invest at the risk free rate of 1.5% when the debt is paid off.
Scenario 2: Pay Off My Loans Slowly & Invest
I am only going to make the minimal required payment over 20 years which is $845.93 per month. Then I’m going to take $796.57 each month and invest it at 1.5% ($1,642.50 – $796.57).
Pay Off Student Loans vs Invest: Results
In scenario 1 you end up with $270,000, scenario 2, you have $223,000 after 20 years. It makes sense to pay off my student loans first then invest in this scenario.
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