stupid to invest while in debt?

[latefordinner]

With the recent poker debacle, I decided to take quite a bit of money offline. I was way overrolled for the limits I play anyway. I just cashed out about 10k dollars. 4k of that paid off a credit card that I should have paid off a long time ago. (26.5% interest [censored]!)

I currently have about 3 months living expenses in an interest-bearing checking account and about 2k in a couple stocks. I also owe about 20k worth of student loans that I'm going to have to start paying interest on when I finish my masters in May (or 6 months afterwards, whatever). about 10k of these are interest free until then and 10k have been accruing interest for about two years.

Should I take the 6k I have left and pay down the loans which have been accruing interest, or should I invest it and not worry about my loans and just treat them like any other monthly expense?? (While it would be nice to think my investments will make more than 6.5% a year, that's certainly not guaranteed)

I feel like it's silly to invest when I'm paying interest on debt for something that has no appreciation value.

[iversonian]

What's your interest rate? If it's as low as 6%, I'd say pay as little as you can. Having the money on hand in case something happens or you want to make other plans is good. And it's not going to cost you too much. It's tax deductible, and a money market fund will yield about 5%. Even if it's like 8-9%, I'd still want at least 6 months of expenses stashed away somewhere before I started hacking away at it. You can always pay it back, but you can't borrow it back at the same tax deductible rate. BTW, I graduated in 2004 and I'm paying 3.375% on my loans :P

[maxtower]

If you are eligible to contribute to a Roth IRA, I would do that first with 4k, and then put the rest to your student loans. Theres two reasons to do this.
1. Roth IRA gains are not taxed, giving you a 25%-30% advantage over funds in a taxable account.
2. There is a maximum contribution limit annually. You want to take advantage of this while your young because getting money in early to compound tax free is a lot better than down the road.

[latefordinner]

6.35% I believe. I'm eligible for about 10k more if I decide by Mar 1st, actually considered maxing it out and ivesting the loaned money but that seems a bit risky (and illegal). I think I'll be able to consolidate a few of the loans down to about 5% after graduation.

[jzpiano]

Where are you guys consolidating your loans for so cheap, I'm going to have to deal with my fiance's loans in about 6 months

[BloodshotX]

[ QUOTE ]
6.35% I believe. I'm eligible for about 10k more if I decide by Mar 1st, actually considered maxing it out and ivesting the loaned money but that seems a bit risky (and illegal). I think I'll be able to consolidate a few of the loans down to about 5% after graduation.

[/ QUOTE ]

I am just starting my masters degree and I get half paid for by work. I am still taking out the full student loans, and applying the extra to my 20% mortgage that is at 9%.

[DesertCat]

[ QUOTE ]
6.35% I believe. I'm eligible for about 10k more if I decide by Mar 1st, actually considered maxing it out and ivesting the loaned money but that seems a bit risky (and illegal). I think I'll be able to consolidate a few of the loans down to about 5% after graduation.

[/ QUOTE ]

Remember, if you pay down this loan, 6.35% is your "after tax" return on that investment. Depending upon your state/tax bracket, that is equivilant to investing in a 8-9% pre tax return investment. It's unlikely the stock market will earn more than 8-9% per year pre-tax over long periods.

And paying down the loan has zero volatility risk while putting money into the market exposes the investment to the risk of short term loss, while you are piling up interest on the debt.

There are two exceptions to this. First an index fund doesn't lose much to taxes while you hold it, and if you hold it long enough most of it's gains are long term capital gains. So theoretically you could buy an index fund, accept the volatility risk, and you are likely to be ahead slightly in 10 years or so.

The better option is what MaxTower said about the Roth IRAs. You are given an opportunity to fund a Roth each year that's very valuable in the long run. And the earnings grow tax free, so this offers the highest potential return, albeit with volatility risk. So it might make sense to fund a Roth first.

But there is nothing wrong with just paying your loans off. You will get a very high after tax return that has no volatility risk. When you pay it off your cash flow immediately improves. And that's a good feeling.

[scotchnrocks]

I agree with Desertcat. It feels so much better to pay something off.

More cash flow, no payment coupon to remember to mail out, and less overall hassle. Try investing the difference and then you have a payment to be made every month on the loan still, you have to sweat what the market is doing, and taxes are a little more complicated. On top of this, there is a real risk that you will lose money over paying off the loans.

I'll happily give up a few bucks for more peace of mind and less stuff to keep up with.

[squiffy]

When it comes to finances, I think it's important for most people to play is conservatively. Just try to hit singles. No need to keep trying for home runs and increase your risk of striking out.

If you are Warren Buffett, invest the money and make 20%. If you are the averagae investor, play it safe and go for a decent guaranteed return.

We don't have any idea about your investing ability and track record, so there is no way to give you a "correct" answer.

If you have limited investing experience, play it safe and start paying off the debt.

It was definitely a good move to pay off the credit card debt.

If you think you may run up more 25% debt for basic living expenses, then perhaps you should keep the money and spend it, to avoid the 25% debt, which you are certain to run up anyway.

If you can avoid running up the debt at 25% interest, then by all means, use the extra cash to pay off the highest interest student loan.