Should You Pay Off Student Loans Or Invest? – Forbes Advisor

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If you’ve attended college, you likely have a significant amount of student loan debt. Student loans can be an immense burden, and sticking to your monthly payments can make other financial goals difficult to meet. In fact, a study by MIT AgeLab found that 84% of American adults said that student loans had a negative impact on the amount they could save for retirement.

When you are dealing with student loan debt, it can be difficult to decide whether to repay your loan or invest in your future. So that you can make the right choice for you, we have briefly broken down when you should pay off student loans or invest your money.

Should I pay off or invest student loans? 5 factors to consider

When it comes to personal finance, experts usually recommend focusing on two things: paying off debts and saving for retirement. But it can be difficult to save for retirement when you are burdened with student loan debt. To help you decide where to put your money, consider the following five factors:

1. Interest rates on student loans

The interest rate on your loans should help you make your decision. Your interest rate will affect your monthly payments and the overall repayment cost. When you have high interest rates, the interest rates can accrue quickly and increase your loan balance. When this happens, it may be wiser to pay off the debt to lower your interest costs and it will free up more money.

2. Type of credit

There are two main types of student loans: government and private. Federal student loans are provided by the government and typically have lower interest rates than private loans. You also have more benefits and options for borrowers, including alternative payment plans and lending programs.

Private student loans are riskier forms of debt. They offer less protection and repayment options than federal loans and often have higher interest rates.

3. Employer contributions

When weighing the pros and cons of investing versus paying off debt, be sure to review your unemployment benefit package. If your employer provides their employees with a retirement plan like 401 (k) and contributions, it is a significant benefit that you may not be taking advantage of right now.

4. Financial goals

Think about your goals. If you are trying to become a homeowner or start a business, you may find that your loans are holding you back from meeting these milestones. In contrast, if your goal is to retire early, you should focus on investing.

5. Age

Your age can affect what you should prioritize. When you’re right out of college and in your 20s, you have more time to save up for retirement. But when you’re in your 40s or 50s, you don’t have a lot of time to waste if you don’t currently have enough money saved in a retirement plan.

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When should you prioritize student loan repayment?

A frequently asked question is, “Should I pay off or invest my student loan?” While there may not be the right answer for everyone, here are three scenarios when it might make sense to prioritize repaying your loan before taking out your money invest.

1. Your loans have high interest rates

Student loans can have very high interest rates. According to The Institute for College Access & Success, private student loans had interest rates of up to 14.24% in 2019. While federal loans tend to have lower interest rates than private loans, their interest rates can still be high. For example, Direkt PLUS loans that were granted to parents or graduates earned interest at an interest rate of 6.3% for the school year beginning July 1, 2021.

If you have high interest debt, the amount of interest you would earn on the stock exchanges can be higher. Hence, it can make sense to tackle your loans first.

To see how your interest rates affect your payments and total repayment, use the Forbes Advisor Student Loan Payment Calculator.

2. Your loans are variable

Federal student loans always have a fixed interest rate, so your interest rate stays the same for the duration of your repayment period. This is not always the case with private student loans. Some personal loans have floating rates that can change over time.

While floating rates can start out low, they can go up sharply. If you have an adjustable rate loan, you can avoid subsequent market fluctuations and save money by repaying it as quickly as possible.

3. Your credit causes stress

Personal finance isn’t always about numbers; it can also be very emotional. If your student loans are causing you significant stress or holding you back from lifestyle goals like owning a home, it may be worth paying off your loan first just to feel reassured.

When should you prioritize investments?

If you’re not sure whether to invest or pay off student loans, here are a few situations where prioritizing your investments can make sense.

1. Your employer offers appropriate contributions

If your employer offers an equal-contribution pension plan, that is a significant benefit.

According to Vanguard’s How America Saves 2021 study, 59% of employers offered equal contributions in 2019. Unfortunately, almost 40% of workers miss out on full dues because they fail to attend. And if you don’t make enough contributions to qualify for the entire game, you will lose money that is part of your compensation package.

In the most typical matching structure, the employer pays $ 0.50 on the dollar for the first 6% of the employee’s salary. For example, if you make $ 50,000 a year and add $ 3,000 to your 401 (k) – 6% of your salary – your employer will contribute $ 1,500 towards your retirement.

If your employer offers congruent contributions, you should prefer the full company settlement before the debt repayment.

2. Your bum in retirement plans

About a quarter of non-retired adults have no retirement savings at all, according to the Federal Reserve. If you haven’t started saving for retirement yet, it probably makes sense to defer repaying your loans early so you can focus on building your retirement savings.

The earlier you start saving for retirement, the less of your own resources you will have to spend on living after retirement. Market returns and compound interest over time are powerful tools that can help you build your nest egg.

If you wait until a later point in life – when your loans are paid off, for example – you will have to work a lot harder and save a lot more to meet your retirement goals.

3. Your loans have low interest rates

Depending on what loans you have and when you took them out, they can have low interest rates. For example, directly funded loans for Bachelor students, which were paid out between July 1, 2020 and June 30, 2021, had an interest rate of 2.75%.

Compare the interest rate on your loan to your expected return on investment. The annual return that you can expect on your retirement investments is typically 4% to 7%. If the expected rate of return exceeds the interest rate on your loan, prioritizing your investments may be a better choice.

Hybrid approach: pay off student loans and invest at the same time

While many people opt for one goal or the other, it doesn’t have to be all or nothing. You can take a hybrid approach and work towards both goals.

Think about what extra money you have each month to help you meet your financial goals. Divide this amount in half and add to each goal. For example, if you have $ 200 left after paying all of your bills, invest $ 100 on retirement and use the remaining $ 100 to make additional payments on your student loans.

While you will move more slowly than if you focused on one goal at a time, you will still make progress and improve your overall financial picture.

Choosing a debt settlement strategy

When you’re ready to start siphoning off your student loan balance, you can speed up your repayment by employing repayment strategies like the debt avalanche or debt snowball methods.

Depending on your mindset, your best option may be to focus on the debt with the lowest interest rate. Or, you can stay more motivated by paying off the lowest balance debts first. Whichever withdrawal strategy you use, you will pay off your loans faster and meet your goals sooner.

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