investing with student loans

[The DarkDragon]

Here's the thing with building your credit score. You will
have many more opportunities to build your credit score, because that's how life is whether you take that route using credit cards, buying a car, etc.

Being in debt sucks, and the quicker you can get out of debt, the better. So take that route if you have the opportunity.

-The DarkDragon

[Big TR]

If the interest you are paying on the student loan is tax deductible, then you need to crunch some numbers. If it turns out to be close to a wash between the risk-free return and the after tax interest, I would recommend making payments on the student loan.

If all things are equal, and you don't have an aversion to debt, it will help build your credit score.

[CrushinFelt]

[ QUOTE ]
I have about 20k in student loan debt with an interest rate of about 7%. Payments and capitalization start this summer, when I will also be starting my first full time job. I just discovered that the interest payments will not be tax deductable due to my income level.

I have about 20k saved up right now. I could just pay off all the student loan debt. However, I also could put the 20k in an agressive portfolio. Assuming the investments make 10%+, I should theoretically take as long as possible to pay off the student loans while that 20k makes a few more percent than the interest accumulating on the loan.

Is this reasonable? What practical factors might make this a bad idea?

Thanks.

[/ QUOTE ]

I would without-a-doubt pay down something like 50% or so of this. Then I would use what is left over to begin your investing career. I would then try to budget income from your new job to pay off your student loan payments each month.

If your question is to either pay the whole thing or pay none of it then I would choose to pay the whole thing. I would wait to invest on margin (which is what your student loan has basically become @ 7% interest) until you are much more experienced with the markets.

[kdotsky]

[ QUOTE ]
Note that you're going to be taking on a ton of variance relative to your expected return. Your StD is going to be about 10x your return. For a normal investment in say a total stock market fund, StD is prob. closer to 2x return.

[/ QUOTE ]

This just occurred to me and I'm glad to see you pointed it out. I think this is the best argument against making payments. I'd basically be going from 0 StD to the StD of an agressive portfolio in exchange for a couple percentage points, which is not the kind of risk vs reward trade-off people typically find acceptable.

[prohornblower]

What sounds better? A guaranteed 7% return, or the chance of a 10% return?

If you had zero capital and zero debt, would you go borrow 20k @ 7% to invest in agressive stocks? I doubt it.

I think you should pay the majority of the loands off, leaving yourself some cash reserves.

Plus, what is your income? You said it is high. If it's high, then it won't take you long to get back to 20k.

[jackblack73]

Do you have any other savings? Would you still have enough for 3-6 months worth of living expenses if you use it to pay off your student loan?

[SlowHabit]

Flip for 20k; your dilemma is solved.

On a serious note, pay off your debt, especially if the interest isn't tax deductible. And this is coming from a guy who like to press his edges.

Another thing, your idea isn't so bad if you have a bigger cash flow where the fluctuation of the market won't cause you to sell to pay off your monthly debts.

[Karmic]

Generally pay the student loans off as slowly as possible until your income exceeds where you can take the tax deduction. You are already there, but can use the 20k to reduce your future Car and possible house loans that will be at a much higher percentage especially if it is your first car. If you can pay your car off in full do it. Invest some of the rest and put 4-5k into a high yield savings account or electric orange checking to use in emergencies.