Student Loans: Should I Pay off My Debts or Start Investing?

Finding Financial Clarity in a Society That Is Indebted $1.5 Trillion in Student Loans

Here we are. You’ve made it! (as they say). Now that you have gotten your degree (or still working towards one), hopefully you are working a job that you find to be fulfilling and are able to begin contributing to your company’s 401(k). You want to buy a house, enjoy life and plan for the future. Here’s the fun part. You had to take on thousands of dollars in debt for a degree that, on average, takes 10 years to pay off. Depending on which source you find your information, it often takes longer. Throw unplanned life events in there and add a few more years to that equation.

So, if you graduate when you are twenty-two years old and follow the average repayment plan (which takes 10 years), you will not be paying off those debts until you are thirty-two. Thinking about graduate school? Go ahead and add a few more years to that. Now you are mid-thirties, maybe pushing your forties before you have even paid off the degree(s).

Sure, obtaining your degree is an investment in you. There is no better investment than one that is geared towards bettering yourself which allows you to better those around you. That is one of the many contributors to creating value in society. By creating value, you are rewarded both financially and hopefully even emotionally.

Here’s the kicker if you kick your student loan can down the road. Unlike other debt that gets incurred in society, student loan debt is debt that you can not file bankruptcy from easily or run away from. There are one, maybe two, stipulations that allow you to. I am not advocating for bankruptcy, but it is to show that this is a debt that is extremely difficult to get rid of outside of biting the bullet and paying it off. Point is, your student loan debt isn’t going anywhere, so you shouldn’t brush it under some carpet, whether small or large, thinking it will take care of itself.

You need to set specific goals so that you are paying off your loans in a much shorter time table. The sooner you pay off the loans, the earlier you can begin to have your money working for you, and not against you. Granted, you’ve already had your money work for you towards earning your degree, but now it is about having your dollars bring you a monetary return outside of what you receive from your active income (working for an employer, or yourself).

Let’s pretend you are happily employed with a company that does a 401(k) match. Definitely, and I mean definitely, fully contribute to where you get the full employer match. That is free money the company is willing to give you that gets invested directly into the market. Typically, companies will match up to 4 percent. So, contribute 6 percent as an employee and see 10 percent (your 6 percent and your employer’s 4 percent match) of your income being contributed into the stock market. This can give you confidence that you are building wealth while you tackle your student loans.

You might be curious if you should add even more income towards your investments or start chipping away at the loans. Here is one question for that. Let’s reverse engineer this for a moment. Would you take out student loans to invest in the stock market? For most people, their response would be a quick “No”. They probably would not take out a loan to put money into the market. If you would not take out a loan to use that money to invest, then you should focus your attention on eliminating the student loans that you have instead of trying to tackle multiple things at once.

The average student loan is approximately $37,000. Student loan interest rates typically vary between 4–10%. Here is a very straight forward calculation to show what you would pay for a 10 year loan at a 5 percent interest rate. If your rates are higher, just know that you will be paying more annually (yearly) towards your interest.

What if you were able to pay an additional $150 a month towards your student loans? Do you think it would make a difference? By consciously making a decision to put that extra money towards your student loans, you will reduce your payment plan by over three (3) years. There are perks to taking an aggressive approach to paying off your student loans.

I do not want to bore you with the numbers, but when you see the difference in the time it takes to tackle the debts by increasing the amount you pay towards the principal, it is hard to not want to start pulling back the furniture comforters to find loose change. Side note. Do people still even do that these days? I mean, everyone uses credit and debit cards now. I am legitimately concerned young kids these days will not experience the joy and excitement of finding money in the crevices of the couch. I digress. Here is one final calculation to show how much time you would reduce your payment plan by if you paid an additional $300 per month towards the principal.

Do not be confused by the monthly payment not changing. That is the rate that is initially set when you take out the loan. The “extra” is just that, extra money you are paying on-top of what is required from you every month. Once you know that you could pay off your $37,000 student loan in just five (5) years, it makes you realize that this is a mountain that can not only be climbed, but conquered.

If you have found a way to conjure up an extra $300 a month, by either finding an extra side-hustle or sifting through the furniture like I had mentioned (but please, please, leave something for the kids. Do it for the children). You not only paid off your student loans years ahead of what was planned, but have saved thousands of dollars in interest. On top of that, you have found the dedication and determination to allocate a certain amount of money towards a goal. Don’t stop there. Now, use that money that you would have been putting towards your student loans and begin investing it into the market and begin to watch your financial journey and future become brighter.

Whether you graduated at twenty-two or forty-two, the same principle applies. Even though your debts may seem high and the journey long, creating a vision and a plan to pay off your debt will be extremely rewarding. Just do not forget to treat yourself along the way. Do not neglect to take pictures as you trek the mountain or reward yourself during the climb. Even if you do not make that extra payment every month, resting is different than giving up.

*This is not financial advice. For educational purposes only.