Pay Off Student Loan Debt Early or Invest?

by Paige Estigarribia
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You’re making your scheduled student loan payments and have even started investing a bit. But where should you put extra money? We get expert advice on how to determine whether it makes more financial sense to pay down student loan debt or invest that extra cash.

Student loan debt is a looming issue in the U.S. Whether you’re setting up a payoff plan or you’ve been paying your loans for years, you’ve likely wondered about paying them off early. If you paid them down early, what else could you be doing with that money?

To get some ideas on paying off student loans and investing, we reached out to Ben Wacek, owner of Guide Financial Planning, a Minneapolis-based financial planning firm. Here’s what he had to say:

Q: Is it always a good idea to pay off student loans as quickly as possible?

Mr. Wacek: There are many factors that go into this decision, but the short answer is no. From a purely numbers standpoint, a debtor will always be better off if they are able to invest excess income and earn a higher return than the percentage of the interest rate on their loan.

However, this decision is not purely based on numbers and even more important is the borrower’s view and beliefs about debt and how important it is for them to pay it off.

For example, Proverbs 22:7 says that “the borrower is slave to the lender.”

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Q: When would it make sense for someone to delay paying them off and invest instead?

Mr. Wacek: There are many reasons to consider delaying payments to student loans and investing instead. One of these reasons may be if you’re able to refinance your student loan to a very low interest rate in order to increase the chances of an investment earning a higher rate or return than the interest rate.

Another reason to potentially delay paying of student loans is if you work for the government or a non-profit organization and qualify for Public Service Loan Forgiveness (PSLF). If so, you may be able to have your entire outstanding loan balance forgiven after 10 years!

Q: How would someone decide whether to pay them off or invest?

Mr. Wacek: Some of the steps that I’d recommend taking in order to make this decision are: 1) checking if you qualify for loan forgiveness, 2) determining the interest rate on the loan and if you may be able to refinance to a lower rate, 3) figuring out where you’d invest the funds if you didn’t pay down your loan and what rate of return you might expect to get, and 4) deciding how you feel about debt.

Q: What are some potential pitfalls with delaying paying off a loan and investing instead?

Mr. Wacek: The biggest potential pitfall with delaying paying off the loan and investing instead is that there is a chance your investment account could decline in value, so the money invested could be worth substantially less than the amount that could have been put toward paying off student loans.

For example, during the financial crisis, the US stock market was down more than 35% in 2008 alone!

Q: When making this kind of decision, is there anything that many people forget to consider?

Mr. Wacek: I think that the most important thing is not to be paralyzed by this decision. However, this decision is worth taking time to evaluate.

Whether you take an extra $100 from your paycheck and make an additional payment toward your student loans or invest it, either option will increase your net worth by $100. For this reason, the most important thing is just to do something with this $100!

Reviewed July 2021

About the Expert

Ben Wacek is a Minneapolis, MN  Fee-Only Financial Planner serving clients locally and across the world using virtual meeting technology. He specializes in providing objective financial planning and investment management services using Biblical principles to help clients steward their resources in a meaningful way. Ben Wacek is a NAPFA-Registered Financial Advisor and a Certified Financial Planning™ Professional.

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