Investing vs. Paying Off Student Loans

The Federal Reserve reports that the average college graduate has around $35,000 of student loans—and those of you carrying such debt may find it an impediment to achieving your Rich Life. But the surprisingly good news is that student loans were probably an excellent financial decision. We’ll look into the reasons why in this article. 

Statistics clearly show that college graduates far outearn those with only a high school diploma. (That said, you should take responsibility for researching college majors and their average salaries.)

Please don’t listen to the pundits who have jumped on the bandwagon of saying student loans are “evil” and you should skip college. God, if I hear this nonsense one more time, I’m going to jump up and beat someone with an onion. (That way it’s unclear why they’re crying.)

I used to have anxiety wondering how I would ever be able to pay off my student loans, have savings, and have a retirement plan. Now my student loans are almost entirely paid off, I have savings account (plural), have two retirement accounts, and have   no stress around those things. I have all of it automated, and I know how much money comes in, where   it goes, and how much goes out.

—DEANNA BEATON, 30

Investing vs. Paying Off Student Loans

It can be difficult to hear the drumbeat of “Invest early!” when you’re scrambling to pay $500 or $1,000 toward your student loans each month. But when it comes to paying down your loans or investing, you really have three choices:

■  Pay the minimum monthly payment on your student loans and invest the rest.

■  Pay as much as possible toward your student loans and then, once they are paid off, start investing.

■  Do a hybrid 50/50 approach, where you pay half toward your student loans (always paying at least the minimum) and send the other half into your investment accounts.

Technically, your decision comes down to interest rates. If your student loan has a super-low interest rate of, say, 2 percent, you’d want to pursue option one: Pay your student loans off as slowly as possible, because you can make an average of 8 percent by investing in low-cost funds.

However, notice I said “technically.” That’s because money management isn’t always rational. Some people aren’t comfortable with debt and want to get rid of it as quickly as possible.

If having debt keeps you awake at night, follow option two and pay it off as soon as possible—but understand that you could be losing lots of growth potential just so you can be more comfortable.