by Oscar R. Mondragon
Should You Invest or Pay Off Student Loans?
One of the first questions that comes to mind when you receive a large sum of money – be it from inheritance or simply a bonus from work – is whether you should pay off your student loans and get rid of the liability, or invest it and create an alternate mode of earning.
The thing about investing is that from the outside, it is a very green hill with a rainbow on top, but it is important to note that not everyone gets the pot of gold at the end of that rainbow. Then, there is a liability for you to consider; a debt that needs paying back with interest.
We would recommend that before you move toward either (rather slippery) slope, you should first aim to create a ‘cushion’ for yourself. This includes:
Saving at least 3 months' of expenses for emergencies
Saving a portion for your retirement plan
Paying off the credit card balance for each month
Once you’ve covered that, it is time to consider investment and student loans.
Should You Pay Off Your Student Loans?
The first thing to consider is the interest rate on your student loans. If you are at a point where the interest rate is below 6%, you would be better off investing since the savings you’ll get by paying the loan off will be less than the benefit you get from investing.
If, however, it is higher than 6%, you should pay off the loan to avoid further charges. However, before making a final decision, also consider whether your student loan is federal or private. Federal loans usually have lower interest charges compared to private loans and come with more flexibility.
You should consider paying the loan back first if the interest rate is higher than 6% and it is private, otherwise you might end up having to pay much more in the future.
Remember, paying off that student loan now rather than later is a personal goal; not a financial one. Yes, you will have more expendable income down the road, but it is also important to note that you won’t have an investment account or retirement savings to lean back on, either. We recommend balancing everything out and catering to both these issues together.
If you really need to get rid of your loan quickly, you will have to make more than the minimum amount payable. Paying student loans will give you several tax perks as well, of up to $2,500 as a deductible in one year!
When deciding whether you need to invest or pay the student loan off, always remember to maintain an emergency fund. Sacrificing that just to pay off a loan or set up a retirement plan isn’t smart in anyone’s books.
If you are confused about the decision, you can always get in touch with expert financial life managers at Centric. We’d be glad to help you sort out any issues in your life, be it related to student loans, investment queries, retirement planning, asset management, and more!