Should I Pay Off My Student Loans or Invest?

February 16, 2023

As you manage your finances, you may find yourself wondering whether you should pay off your student loans or invest the money into the stock market, bonds, or other income-producing assets. Both options have their own advantages and disadvantages, and the ultimate decision will depend on your individual circumstances and financial goals. Here is a more in-depth look at each option to help you make an informed decision.


Student Loans

Paying off student debt:

The first option you may be considering is paying off your student debt. This can provide a sense of financial relief and can help you sleep better at night, as reducing your debt can be a weight off your shoulders. Don’t let people underplay the value in this, every persons stress tolerance for finances is different and if you’re losing sleep at night over debt the answer is easy, pay off your debt. In the long term, paying off your debt can also save you money, as the less debt you have, the less interest you will have to pay. Also, paying off your student debt can improve your credit score, which can be useful when it comes to borrowing money in the future for things like a mortgage or small business loan. All of these factors are benefits to paying off your student loans, but what are the drawbacks?

One common drawback is that you are not investing the money, which means you are passing up on the potential for earning a return on your investment. This can be a significant opportunity cost, especially if you are able to earn a higher return on your investment than the interest rate on your debt. Think of it this way, if you invest and get a return of 10% but your student loan interest is only 3%, you are missing out on a 7% return if you pay off your loans. Is this worth the peace of mind? Maybe, but that is up to each individual to decide. This is what makes personal finance and financial planning so difficult, there is never any one size fits all solution. Regardless of what the math and data might tell you, you have to trust your gut and intuition when making these decisions. 



Another option you may be considering is investing your money. This can potentially earn you a return on your money and help you grow your wealth over time. Investing can also provide financial security for the future, as your investments can provide a potential income stream during retirement. In some cases, investing can also offer tax benefits, depending on the type of investment and your tax bracket. Things like IRAs, 401ks and other retirement investments have large tax benefits that should be taken into account when deciding whether to invest or pay off your student loans. Overall investing in stocks or bonds may be the right decision because you are likely to get a better return over the long run. Also short-term debt like money markets, CDs and HYSAs can be a great solution if the rate of the income-producing product is higher than the interest rate on your debt.


However, it is important to note that investing carries risk, and there is no guarantee that you will earn a return on your investment. Your investments could lose value, and you could end up with less money than you started with. It can also take time for your investments to grow, so you may have to wait longer to see a return on your money. Definitely avoid investing if you’re losing sleep at night 0ver your debt, or if you have a tendency to get worried when the market goes down. This will lead to bad losses caused by very common investor psychology such as loss aversion. 


Which option is right for you?

Ultimately, the decision of whether to pay off your student debt or invest will depend on your individual circumstances and financial goals. If you are in a high-interest debt and have a low risk tolerance, it may make sense to focus on paying off your debt first. On the other hand, if you have a low-interest debt and are comfortable with risk, investing may be a good option for you.


It may also be helpful to speak with a financial advisor to help you make this decision. They can take a closer look at your individual situation and help you come up with a financial plan that makes the most sense for you. In conclusion, the choice between paying off student debt or investing will depend on your individual circumstances and financial goals. Carefully consider the pros and cons of each option and consult with a financial advisor to make the best decision for your situation.

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