You might be wondering if you should pay off student loans, or invest.
Prior to making this decision, you should aim to save at most three months’ worth for emergency expenses, save 10%-15% of your retirement income, and pay down your monthly credit card debt.
After you have met your goals, you can decide whether or not to invest any money left over.
What are the interest rates on student loans?
6% per annum is a reasonable return on investment. If student loan interest rates exceed that, it is better to pay them off and avoid interest charges than invest.
Your student loan interest rates should not exceed 6%. If they are, you can put extra money towards retirement or into a brokerage account for non-retirement investing. Your investments will likely earn more over the long term than the savings you make from repaying those loans.
You should remember that if your student loans are a major problem, it is likely you are also struggling to save for retirement. Investing when you are young gives your money more time for growth. Use a retirement calculator to see how much you can gain.
Is your student loan federal or private?
Federal loans have lower interest rates than private loans and offer more benefits like income-driven repayment options. If you only have federal loans, it is likely that investing instead of paying them off makes more sense.
Private student loans are less risky than those with public loans. Refinancing can bring you more benefits. Refinance student loans can lower your interest rates and allow you to pay off loans faster while also allowing you to save money or invest.
If you have a stable income and a credit score of at least 600, refinancing can save you money. Refinancing federal student loan debt can be risky as you will lose repayment options and other protections. Before you decide to go this route, make sure that you don’t have any of these benefits.
How important is it to pay off student loans?
Some people are more determined to be debt-free than others. If paying off student debts early is a personal goal that you are passionate about, and it would bring you more pleasure than having an investment account with a lot of money beyond your retirement savings, then go for it.
To get your loans out fast, you’ll need to pay more than the minimum. Make it simpler by choosing biweekly rather than monthly payments. You may be able to make multiple monthly payments through some lenders.
You can also use tax refunds or extra income from side jobs as a way to prioritize repayment. If an employer offers a student loan repayment program, you can also take advantage.