Wiser Use of Money: Pay Off Student Loans / Invest
 

Hello all,
So I have a, possibly interesting question. I would like to preface it first though.

I have about 55k to invest / use. I have 35k in student loans and am 23 yrs of age.

My question is simply this. What is the more prudent investment, paying off student loans or investing in mutual funds or a spider that tracks various indexes. I have begun looking into obtaining some real estate, however, as a recent graduate without a legitimate (in the eyes of the IRS) occupation it has been very tough to obtain a mortgage. So what is the best move here aside from real estate, paying off student loans or investing?
~Justin

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

What's the interest rate on your student loan?

Most likely, the answer is going to wind up being "invest", by far.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I'm in a very similar situation right now, where I have 20k invested but will be picking up my fiance's 14k in student loans that are going to be at 6.8%. Better to pay off or leave it invested

Also, Jurello I think this topic might be better in the finance forum maybe...

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
I'm in a very similar situation right now, where I have 20k invested but will be picking up my fiance's 14k in student loans that are going to be at 6.8%. Better to pay off or leave it invested

Also, Jurello I think this topic might be better in the finance forum maybe...

[/ QUOTE ]

Whoops I thought it would be a trivial answer because my student loan interest rate was much less, less than the 5% you can get interest on a savings account. Since I am not a financial guy I'll just give an educated guess for now and wait for reinforcements.

I still think it's going to turn out that you should invest, based on the fact that savings account interest rates are a gross underestimate of what you can get from investing, that you can deduct student loan interest from your income tax, and also logic says that if the economy does good your investments will return high %, and if it does bad you will need the money. Also if it's a fixed rate you could always pay it off if it became way favorable to do so. And historic returns of the market.

But I am not a financial guy, so I'll be interested in the answer as well.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Something to keep in mind is that a lot of your investments will be taxed, so you'll need a higher return on an investment than interest rate on your loan to make the investment the correct choice. At 6.8% you should almost certainly pay off the loan before investing.

I have a student loan at 7.2% that I'm aggressively paying down before I start investing. I'm pretty sure I'm making the right choice.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
so you'll need a higher return on an investment than interest rate on your loan to make the investment the correct choice.

[/ QUOTE ]

that's the short answer I think. basically if the loan is below 5% I would invest the money. 5 - 6% it's close. 7% pay the loan down.

but those are just offhand guesses

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
Something to keep in mind is that a lot of your investments will be taxed, so you'll need a higher return on an investment than interest rate on your loan to make the investment the correct choice. At 6.8% you should almost certainly pay off the loan before investing.

I have a student loan at 7.2% that I'm aggressively paying down before I start investing. I'm pretty sure I'm making the right choice.

[/ QUOTE ]

Good point about taxing investments. But dethgrind can't you also deduct student loan interest off of your taxes, to the point where the effective interest rate is much less?

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I know that investing in this case often turns out to be the right choice in practice. But I don't understand why this is the case. If there is an investment vehicle that pays better than lending to students at 6.8% (minus some amount for guys that never pay back), why doesn't the bank put its money there instead?

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Figure out the rate you can invest at (muni bonds aka tax free $ ftw)

Take the rate on the loan + i dunno but is the interest tax deductable?

Then decide

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
I know that investing in this case often turns out to be the right choice in practice. But I don't understand why this is the case. If there is an investment vehicle that pays better than lending to students at 6.8% (minus some amount for guys that never pay back), why doesn't the bank put its money there instead?

[/ QUOTE ]

Because they aren't allowed. Banks aren't free to maximize EV, they have very strict anti-risk restrictions. The amount of risk-averse capital in the market is so big that there are a lot of +EV-situations if you are willing to take a risk, the markets do not reach an equilibrium which rules out these opportunities.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
[ QUOTE ]
Something to keep in mind is that a lot of your investments will be taxed, so you'll need a higher return on an investment than interest rate on your loan to make the investment the correct choice. At 6.8% you should almost certainly pay off the loan before investing.

I have a student loan at 7.2% that I'm aggressively paying down before I start investing. I'm pretty sure I'm making the right choice.

[/ QUOTE ]

Good point about taxing investments. But dethgrind can't you also deduct student loan interest off of your taxes, to the point where the effective interest rate is much less?

[/ QUOTE ]

I just did my taxes last night. 2500 is the max deduction for student loan interest. Came right off my income.

KJS

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

It looks like many will disagree on this. IMO this is not a question of 3% or whatever ev either way. This is a question about how you want to live, your future, and freedom. That means pay the loan off now. Investments go bad, your income might go bad, etc... If you are debt free and have some money in the bank, you can go do what you want. You can also build wealth as you go. Invest your monthly student loan payment or whatever. Until you get that loan paid you have a problem. It isn't dischargeable in bankruptcy I am pretty sure (not legal advice disclaimer, etc....), it doesn't carry great tax advantages, although some is deductible, and limits you in all kinds of ways. If you choose to buy real estate, you will have 2 payments assuming you get a mortgage and assuming you don't pay the student loan.

So I know if the after tax theoretical return on an investment is a few points higher than the interest on the student loan, many will argue that you should keep the debt. Except there is a big, big difference in life between having a debt you can't sell or discharge, having a monthly payment, and being debt free.

You are too young and in too good a position it sounds like to shackle yourself with debt of you don't have to. Sounds like you will have 20K left over if you pay the debt. I would pay the loan, put some in the bank, invest the rest, and add to the investments each month. Then if you decide to buy real estate you will be in a much better position to do it. The coming years might be a good time to buy given all the forclosures. Learn from the people losing their house. Don't carry any other debt if you can avoid it and don't go overboard on mortgage debt either. You will get the same arguments about whether to pay your house off or invest and the same talk about comparing percentages of return vs. interest. But owning a house allows you more freedom than financing one. Not saying don't finance and I'm certainly not saying buy a house instead of investing. Long term you want to own your home and have investments, right? So start. Dump the debt IMO.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

This seems like simple math:

Will the money you make from investing be greater than the interest you will be paying?

I would tend to go with the safer route and pay off the debt. Investments aren't a sure thing and it just feels good to be debt free.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Yeah, true, you can deduct student loan interest so I guess the tax thing can cancel itself out and you essentially have a straight up interest rate comparison. In my personal situation, I come nowhere near the 5000 standard deduction so I just take that anyway.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I'm in a similar situation as well. I just received a death benefit claim of around 50k, w/ a little more than 25k in debt. I am planning on putting the maximum (4k/yr) into a Roth IRA. The interest isn't taxable. While I put my $$$ into that I'm going to keep the rest in a regular savings account and some into Vanguard Index Funds, but probably only 5k or so. Here is my reasoning:

1) No tax on the interest in the Roth IRA
2) I can take out the principle at any time w/ no penalty.
3) Housing market sucks right now. (prices are on a decline)
4) I am comfortable w/ my income/bill ratio, so keeping the monthly payments isn't that big of a deal

Just my .02

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Student loans are at such cheap interest that you would be foolish to pay them off early when you could easily invest your cash and get a return higher than the interest you pay on your loans.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

"You are too young and in too good a position it sounds like to shackle yourself with debt if you don't have to."

If you have $55K, chances are you aren't going to have much trouble paying that monthly loan payment. Unless of course he's got some ridiculous repayment scheme and high interest. For a lot of people my age, the interest on the loan is is under 4%, and it's easy to get better than that in a simple and safe savings account. As much as being debt free is nice, student loans are about as cheap a debt you can have, and having liquid cash is a really nice thing. I'm in a position where if anything major comes up, I can pay it and not leave myself in a jam. I'm not losing any money not paying the loan, and I keep myself 15K richer in the meantime. That's a lot more freedom in my eyes.

Anyway, this is a pretty simple issue. Look at your interest, look at your investment opportunities, assess the risk/reward, assess your own comfort/mindset of being debt free, etc etc. Myself personally, I'm not investing at a big enough clip such that my net gain of not paying off the loan is all that huge. But I feel a lot more comfortable with that 15K in my bank than not. For others, not owing anyone anything is a comforting feeling, and they'd gladly pay it right away.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

J,

I agree with HDPM here. Sure, maybe you can average a couple of points more on your 35k by investing. Not really a significant amount of money. On the other hand, to be able to not carry any debt, man I love that flexibility. For me it's a no-brainer, pay off the loans.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

BTW, stupid beat. I forgot to change my address with the State Student Bank and thus didn't pay a bill or the 2nd request. They then sent me a bill for the whole loan (about 30k). I didn't want to do it due to the low interest. I called them and said: "relax, I will put something as security". They agreed and I put my flat as security. Later I sold my flat and a few days after the sale my real estate broker called me and said "we transfered you all the money, but now these guys come and claim 30k, can you transfer 30k back?". I called them and offered some other security to keep the loan, but they refused since it was worse than my previous flat.

Cliff notes: I am stupid.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
J,

I agree with HDPM here. Sure, maybe you can average a couple of points more on your 35k by investing. Not really a significant amount of money. On the other hand, to be able to not carry any debt, man I love that flexibility. For me it's a no-brainer, pay off the loans.

[/ QUOTE ]

Just a small point. A loan at 3% is technically free money, you're simply paying inflation.

I'm pretty biased since I had one of my larger investments make an average of 14% or so for the last 5 years.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

18k of it was a personal student loan at 9.25% now
18k is at 4.75%

I am assuming it would be prudent to pay the 9.25% now and then maybe pay the other off piece meal? I am contemplating just paying them both off as I would then literally have no monthly payments outside of a cell phone. I own my car free and clear and have paid rent for the next 6 months. Outside of poker, upon acceptance of a job offer I recently got I will be making $75k+ a year so the $400 I am paying a month now could get moved to investments as I move along.
~J

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Oh wow, I was totally assuming a lessor rate.

Pay those off and it's not close imo.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
Oh wow, I was totally assuming a lessor rate.

Pay those off and it's not close imo.

[/ QUOTE ]
Yea, I didnt realize half of it was so high, I am going to pay the 18k off at the huge interest rate, then maybe leave the federal ones @ 4.75% for now and keep a decent amount of liquidity (which would allow me to invest in real estate as well).
~Justin

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I started off putting away enough money that I could live for a couple months if I suddenly got fired. Now I'm paying everything off as quickly as possible while also putting a little more money away. I just hate the feeling of student loans.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Ha, I have been thinking about this alot recently, although it is more of a theoretical fantasy, as I don't have the money to pay it off (broke and talentless FTW!)

I pay $200/month on my 15k loan @2.875%, what are all of your thoughts about increasing it another $100 vs. saving that $100? That may be a bit trivial, but thanks in advance for your thoughts.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

That sounds like a good plan to do half and half. I'm not a financial advisor or anything close but my understanding was that was that when your young is the time to be aggressivve with investments and go for the big returns since you have a whole career of income ahead of you and its not like you need the money anytime soon for retirement or something.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
Ha, I have been thinking about this alot recently, although it is more of a theoretical fantasy, as I don't have the money to pay it off (broke and talentless FTW!)

I pay $200/month on my 15k loan @2.875%, what are all of your thoughts about increasing it another $100 vs. saving that $100? That may be a bit trivial, but thanks in advance for your thoughts.

[/ QUOTE ]

Why, why, why, oh why would anyone even consider paying off a 2.875% loan or paying it faster than the minimum? Considering the rate of inflation is higher than that, and you can get a higher ROR on almost any CD, there is no way you should ever pay this off. Pay any other debt first. Save for a house, as this will reduce your mortgage by giving you a higher down payment. Buy CDs. Play higher stakes. Just about anything other than putting it all on red or buying a scratcher ticket.

FWIW, I am able to get grad stuedent loans that after graduation will convert to 0.75% per year. I will take every penny I can get and pay it off as slow as they allow. When someone hands you practically free money, you definitely take it.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

How the hell is everybody getting loans with the interest rates so cheap? I can't seem to get anything below the 6% line.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

In my state, if you become a public school teacher upon graduation, you get the megadiscount. Some states have similar programs for nurses or other professions that they have a shortage in.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I think my mother has that deal in MA.

As for me, all my loans were federal loans. Initially they were 5.25% I think, but after I consolidated they were 4%, and once I signed up for paying with direct debit out of my checking account, they knocked it down to 3.5% or 3.25.. I forget. It goes down some more after 2 or 3 years of not missing a payment.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
[ QUOTE ]
Ha, I have been thinking about this alot recently, although it is more of a theoretical fantasy, as I don't have the money to pay it off (broke and talentless FTW!)

I pay $200/month on my 15k loan @2.875%, what are all of your thoughts about increasing it another $100 vs. saving that $100? That may be a bit trivial, but thanks in advance for your thoughts.

[/ QUOTE ]

Why, why, why, oh why would anyone even consider paying off a 2.875% loan or paying it faster than the minimum? Considering the rate of inflation is higher than that, and you can get a higher ROR on almost any CD, there is no way you should ever pay this off. Pay any other debt first. Save for a house, as this will reduce your mortgage by giving you a higher down payment. Buy CDs. Play higher stakes. Just about anything other than putting it all on red or buying a scratcher ticket.

FWIW, I am able to get grad stuedent loans that after graduation will convert to 0.75% per year. I will take every penny I can get and pay it off as slow as they allow. When someone hands you practically free money, you definitely take it.

[/ QUOTE ]

For one, I don't like having debt. My student loan is my only debt. For two, it is free money in a sense, but it's money I've already spent. It's not like I can take that money and arb it with a savings account, it's money that has already been spent. Perhaps it is just a purely psychological thing that I would prefer not to have any outstanding debt?

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
If there is an investment vehicle that pays better than lending to students at 6.8% (minus some amount for guys that never pay back), why doesn't the bank put its money there instead?

[/ QUOTE ]

Risk.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
This seems like simple math:

Will the money you make from investing be greater than the interest you will be paying?

[/ QUOTE ]

It's not that simple.

If it was, everyone would be making investments on margin because the market return is greater than the interest rate of the loan.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Jurollo,

Slam dunk to pay off the 9.25%.

The other one is tougher. Does having loans bother you? It really bothers me. We still owe 19K at 5% on med school loans and have not paid them off because of the low interest rate. That debt causes me stress. The money saved is probably not worth it. But we're abnormally debt-averse for our generation, with the exception of mortgages and business leases. Your approach may be different.

For background, my 93-year-old grandmother still separates two-ply paper towels for individual use, among many other Great Depression unfathomables.

Matt

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]
debt causes me stress.

[/ QUOTE ]

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

If you are good at managing and investing your money, hands down it is -EV to pay off your student loans, unless you have a bad interest rate.

My loans are locked in at 3.xx% and I make over 5% just in my internet savings account, much more than this in the markets. The choice is clear. I'd be losing a lot of money by paying off the loans early.

Now if I wasn't good at managing my money or good at investing, then it would be better to pay them off and not have to pay the interest etc

Also important to note that student loans in good standing are considered 'good debt' in that they actually help your credit score and help you to build credit, get loans etc etc.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

[ QUOTE ]

Slam dunk to pay off the 9.25%.


[/ QUOTE ]

Just saw this. At 9.25% pay them off, and now.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I don't plan to hold off on paying student loans to invest in real estate or the stock market, because I want to get clean ASAP. OTOH, a lot of people have interest rates so low it's possible to get an after-tax return just by putting the money in a savings account or CDs. In that case, it seems dumb not to take the free money. You know the money will be there when you need to make payments, and you can always pay off the debt early if you need or want to.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

I've been thinking about this a bunch more tonight, and you all are right, I'm just going to pay the minimum and throw the rest in a High yield savings account or a CD. Thanks for posting this topic Jurollo,it has been on my mind for a while.

Re: Wiser Use of Money: Pay Off Student Loans / Invest
 

Without rehashing HDPM's advice, another benefit to paying off your debt is that it will allow you to borrow money at a much lower interest rate down the road. Assets in the bank,a good debt to income ratio and a good credit score will make borrowing money at great terms a snap should the need arise.