Balancing financial priorities can be challenging and you may wonder if you should prioritize paying off your student debt or invest in long-term goals. The correct answer for you depends on your student loan interest rates and ultimate financial goals.
If you want to avoid getting into debt immediately, it is ideal to put extra money to remove student debt. On the other hand, if your expected return rate is higher than your student loan interest rate, or if you want to tackle financial security, investing could be a better option. You can also choose both if your budget allows.
Early repayment of student loans: pros and cons
If you prioritize removing your debt and have high interest rates or unpredictable cash flows, you should consider repaying your student loan.
Perfect for these situations
- The top priority is people who don’t have debts.
- Borrowers with high profit student loans (over 8%).
- borrowers holding private student loans at various interest rates.
- People who want to buy a house but can’t do it because they have a high DTI.
Investing in student loans: pros and cons
If your investment returns are higher than your loan interest rate, we recommend using compound interest to start your investment.
Perfect for these situations
- Low interest borrowers on student loans.
- A borrower registered in a student loan forgiveness plan.
- People who already have investment knowledge.
Four important factors to consider
“Alumni need to consider more important things: Will they get out of wealth building or debt? says Jack Wang, wealth advisor to innovative advisory groups and host of the “Smart College Buyers” podcast. There is no answer for all sizes. The answer can change over time.
As students and graduates consider this balancing act, the King advises: “Interest rates and profit margins aren’t as much of an issue here as people think. It’s really about giving time (savings and investments), even if it’s a lower rate of return.
Here’s what you should think about when making a decision between repaying your student loan and investing:
1. Personal financial goals
Start by thinking about your overall financial profile. Other debt, savings goals and personal priorities should be considered. Below are other goals you may decide to prioritize:
The ultimate personal priorities to consider are whether invalidating your debt is your biggest goal. If so, you may want to refrain from investing and put all your excess funds into early repayment of your student loan.
2. interest rate
Interest rates range from 1% to 17% or more, depending on when you borrowed the money and whether you have a federal or private student loan. Compare your student loan interest payments with your expected investment return. Stocks can typically provide a long-term return rate of 9% or more per year. However, short-term investments can lead to unstable returns.
If student loan interest rates are lower than what you can realistically expect to win investments, it makes sense to prioritize investing earlier than paying off your student loan.
3. Tax credit
If you are paying off your student loan, you may be able to deduct any interest payments made on that debt. Eligible borrowers are allowed Lowers taxable income Up to $2,500 will help offset student loan costs over time.
At the same time, you can also deduct contributions that contributed to a 401(k) or traditional individual retirement account. Think about which tax credits are more important to you.
4. Forgiveness Program
If you have a federal student loan, you may be able to get student loan forgiveness. To ensure eligibility, please take a closer look at the details of your loan exemptions.
If you plan to use it Forgiveness of student loansand then there’s no point in making extra payments to your debt. Instead, you can put extra money into your investment and grow your money over time.
Conclusion
Deciding whether to pay back or invest in your student loan depends on your financial goals and which options earn you better returns. If your investment is high, making a minimum payment and investing additional cash may be a good option. On the other hand, if student loan interest exceeds possible investment returns, it is a good idea to prioritize debt payments.
It is important to note that depending on your financial situation, you may not need to choose to pay off your student loans faster or vice versa. If you need help deciding what to do, contact an investment professional.
