Should I finish paying off my student debt before I start to invest in the stock market?
March 10th, 2010 | 
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buttercup asked:
I’m looking at about $15,000 in federal student loans. I believe the current rate is around 7%, but I’m hoping to consolidate and get it down to 6%.
I’m looking at about $15,000 in federal student loans. I believe the current rate is around 7%, but I’m hoping to consolidate and get it down to 6%.
Should I pay it all off in a hurry and then get to investing, or are there certain type of investments that are worth getting into right away?
Thanks!
School Loans Consolidation
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Credit Card Debt Elimination
hi ya, if that was me i would pay my student loan first before any thing else.
but at the end of the day it what you wont to do…..
Credit Card Debt Law
why not do both? With the recession, i’d say it’s a good time to invest. If you have $100, pay $50 on your loan, $50 on your investments. Then everybody is happy.
Consolidating Student Loans
You should try to do both. If your employer has a retirement plan, definitely contribute at least up to the match. If not, consider setting up an IRA or Roth IRA, depending on your income and whether the tax deduction is worth it. Figure out how much you can spare each month (try to do more than you think is comfortable at first, telling yourself you can ratchet it back – often people find it’s doable!) and allocate part to the retirement investing and part to reducing debt. I’m assuming you have no credit card or other debt, right?
Consolidating Student Loans
I’m in your boat, but my loans add up to over $100,000. $15,000 isn’t that much, so you could have it paid off in a couple of years (based on your income), but that shouldn’t keep away you from starting to invest (it’s NEVER too early). The way that I see it, and have been told by many, is that having debt is fine, and sometimes even good (even with my debt my credit score is still over 780). Say you make some sound investments now, and in a couple years, after you’ve been paying off the loans, those investments amount to enough to help you finish off those loans. You don’t want to pay off the loans asap, then be broke, you’d MUCH rather have money in the bank and be in debt. What you should do is try to pay more than the minimum on your payments for the loan (to pay it off earlier rather than later), while, taking your income into concideration, deciding how much money you could safely have tied up in investments. People will argue to use an online broker, or something like that, so you can sell if you need money, but that puts you in a position where you may need to sell at a loss, which defeats the purpose of investing (we are never always in a profit position with investments). You want to be able to hold those investments without having to worry about them in the short term. Then 3, 5, or 10 years (depending on how quickly you cut down that loan), that loan can be paid off entirely and your investments will have had time to mature. No one can give you an exact answer to this question, because it all depends on your financial position now, and later. Of course if your strapped for cash, just pay the minimums (always do that) on your loan, and wait until you start becoming comfortable before looking to invest. Take everything into consideration before you make the call. Good luck.
Bad Consolidate Credit Debt
It does depend a little on how good of an investor you are. The better you are, the more likely you shouldn’t pay off your loan.
But even if you **** at investing, there’s a great argument to not pay off the loan.
The loan’s interest is 6 or 7% per year in expense you have to pay. But, you get a tax deduction each year for that interest expense, so after tax, you could fairly reduce the interest expense by a half percentage point per year. So, it may be costing you only 5.5% per year after taxes if you consolidate.
On the other hand, stocks will return even an idiot 10% per year as long as they hold an index or mutual fund with no or low expenses. Paying off the loan will force you to incur a large opportunity cost.
So you will become wealthier over the long term if you use your money to invest in stocks rather than pay off your loans. The difference is 10% per year minus 5.5% per year = 4.5% per year better.
That 4.5% difference per year compounds too, so if you took say 15 years to pay off your loan, that 4.5% spread per year would result in 1.045^15 – 1 = 93.5% before taxes, and about 80% after taxes.
So, if you do invest, you’ll be almost twice as rich buying stocks vs paying off the loan.
The only consideration here is: Can you afford the leverage? In other words, can you afford to make your student loan payments? If so, stocks are the better way to go.
One more consideration: Margin loans to buy stocks usually charge interest rates of 7-8% and the interest isn’t tax deductible like student loan interest is. So you could look at it like you are actually getting a government subsidy to invest in the stock market that is tax deductable.
:-]
Student Loan Debt Consolidation
Keep paying off your loan and if you have an extra money, save it up to invest.
Student Loan Debt
Yes, pay off the debt first then think of investments.
Consolidating Credit Card
Math: If you can make more than 6% net investing, invest, if not pay the loan. Paying the loan at least has has a guaranteed return of 6%