Should You Invest Before Paying Off Student Loan Debt?
Student loan debt is no joke. My 1991 $10,000 student loan debt from Sarah Lawrence College (the first of many higher ed degrees I would earn, and pay for), would today, in 2021, be close to $80,000. With so many people dealing with student loan debt totaling well over a trillion dollars in the country, the pricey admission to education feels like another public health issue. For many, the debt is so high that paying it back is a decade plus (plus) endeavor. Forget about a mortgage, when you owe Sallie Mae close to a quarter million.
Having student loan debt does not make you immune to wanting to invest their money in something other than loan repayments. Aside from a limit in disposable income which could be socked away in an index fund, the rule of thumb is to pay off debt before even getting into investing. Of course the common sense behind this thought process is that one should not invest money that they cannot afford to lose. But the rule-busting ethos challenges why anyone should put their future on hold to repay (in blood, dollars, and sweat) for their past?
Would it hurt to invest before paying those loans off fully?
Here’s why investing before fully satisfying student loan debt could pay off (no pun intended).
The Government Plans to Cancel Student Loan Debt
While the administration has temporarily halted student loan repayment and interest accumulation, there’s little clarity for what Biden or Congress plan to do regarding student loan debt cancellation or forgiveness. This means, the debt is still there.
However, if the decision is made to cancel any of student loan debt, the type of loans, age of loan, and demographics of the borrower (say GenX vs. millennial, high earner vs. low income) may well be a part of the forgiveness criteria. It would be wise to continue stashing away those payments in some way. Consider setting up a separate savings account and putting those payments in escrow or simply earmarking them in your regular savings accounts. If you need that money for regular living — shelter, food, etc, save as much as you can and then contact your student loan lender and make arrangements for deferment or IBR, income-based repayment. This creates a paper trail of your situation which again, may be used as criteria for any mass debt cancellation.
In short, hold off financially to see what debt could be forgiven.
The Interest on Student Loan Debt Accumulates Substantially
People spend decades paying on student loans and interest is to blame along with insufficient income for the struggle of paying loans back. Some repayment programs require debtors to pay on student loans for 20 years before getting a percentage of debt canceled or forgiven. C-R-A-Z-Y!
The long repayment timeline in student loan debt is because the interest accumulates substantially over the years. While percentages seem small when taking out the loan, over time it builds up and many pay large monthly payments and it could only be going to interest. Federal student loan interests are set to increase this summer on new loans making another generation fall victim to the struggle of debt repayment.
Imagine investing for two decades versus paying interest and principal on a student loan. There’s a possibility you could have profited in investments more than you would have been making payments on an average or below-average income.
Never Underestimate the Power of Investments
In a perfect progressive world, higher education would be affordable if not free, and the minimum wage would be reflective of the living (well) wage. Young people could choose study paths based on their true interests and passions, not strategic calculations of which career will allow them to afford the debt they’re forced to incur. But change isn’t created in a day and even with student loan debt stacked against folks, there are still ways to pay back debt and still invest in your life.
Here are a few questions you’ll need to ask yourself to determine how you can invest with student loan debt.
- After paying the minimum balance, how much more is left over? If you have a considerable amount left over from your monthly minimum balance, ask yourself where else that money could go. Of course, you can pay off more on your amount due but you could also invest that extra cash in to income generating funds.
- Determine what type of debt you have and the terms of repayment. As mentioned above, the principle debt amount is not nearly as sharp of a sting as the interest. Ask yourself if debt consolidation is possible or refinancing the loan and interest rates. If these tweaks make repayment easier, then take advantage of it and instead of using the difference in payment amount for shoes and take out, sock it away in an invest fund.
- What are the tax benefits of paying student loans vs. investing in your retirement account? While you can deduct $2,500 of student loans at tax time, that same $2,500 over 5 years can earn you $6,956.82 with compound interest and a modest monthly contribution of $50. And as far as tax deductions go, you can deduct up to $7,000 for annual IRA contributions.
- Do you have any kind of savings? Investing is a times thing as much as a numbers thing. The sooner you get in, and the longer your investments have to mature, the sweeter the fruit of efforts. If you don’t have any kind of savings, that should be your first stop on the investment path. Work toward setting up a liquid emergency fund that will cover your essential expenses for 6–12 months. Once that’s set up, you can segway into accounts and such that are designed for reserves (say a down payment for that dream condo) or growth (retirement in Amsterdam).
- What are your priorities now? You can vision board away but after you’ve cut and pasted your ideal financial life, you have to actually do something. What are you willing to do (or not do) to get your debt reduced or to squeeze out a bit more from your take-home to put away in investments?
Invest in things that have exponential growth so that an ROI can build faster such as cryptocurrency or high-yield savings accounts. The key is to have enough money to comfortably pay off debt without your standard of living being affected. Look into what investments you can afford to do today that can eliminate your student loan debt tomorrow.
If your ROI is higher than your student loan interest, then you can comfortably risk exploring dedicating time and cash to getting the investment ball rolling. Set up an IRA and put in as much as you can for six months, then dedicate that overflow toward your student loans.
Ultimately, whether or not you decide to focus on debt-freedom alone or while also contributing to an investment plan is a personal decision as much as it is a financial one. It is however possible and worth consideration.
This article originally appeared on The Homesteadista.
