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Should I Pay Off Student Loans or Invest My Money?

Should I pay off my student loans or invest the money?

Benjamin Smith


Summary: In this article, you will learn if you should pay off student loans or invest your money. Student loan debt continues to be a key roadblock for young people wanting to buy homes or invest their money elsewhere. Read on to learn more about the best options to ensure your future financial success.

Average Student Loan Debt 2021

With the average student loan debt reaching an all-time high in 2020, many recent and not-so-recent graduates are questioning if they should pay off their student loans or invest in retirement, the stock market or real estate. In the following article, we will discuss why so many are choosing to invest their money rather than paying off student loans early.

The average student loan debt is over $37,691. As of 2020, the total student loan debt has reached an all-time high of $1.71 trillion. In the consumer debt category, student debt ranks second highest, only topped by mortgage debt. Currently, there are 45.3 million student loan borrowers in the U.S. While student loan debt spans all ages and demographics, the largest category of student loan borrowers is under the age of 30, followed by 30-39.

The states with the greatest amount of student loan borrowers belongs to more populated states. California, Texas, Florida and New York account for more than 20% of all student loan borrowers. The state with the highest average student loan debt is New Hampshire, with over $36,000 per student, followed closely by Pennsylvania and Connecticut. The lowest average student debt states include Utah at just under $20,000, followed by New Mexico and California.

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Other Interesting Student Loan FAQ 2021

  • 43% of people who attended some sort of college incurred educational debt.
  • 65% of college students graduate with student loan debt.
  • In 2020, private student loan debt went up by $16.8 billion (14% increase).
  • Student loan debt is growing 353% faster than the rising cost of tuition. 

Based on this data, it’s clear that cost of education and student loan debt is steadily trending upward. Having a bachelor’s degree these days no longer sets you apart when applying for most decent paying jobs. Because getting a college education is no longer the exception, but the norm, student loan debt will continue to rise.

Which brings us back to the question, should I pay off student loans early or invest?

Should I Pay Off My Student Loans Early?

If you have student loans, you may have asked the question: should I pay off my student loans early?

Today, many young people are choosing not to pay off student loans early. Instead, they are investing their money in cash flow producing assets like real estate.

We’ll discuss how to do this later in the article.

Let’s start by diving into questions everyone with debt may be asking themselves. Do I have an emergency fund? Am I contributing money to my retirement? What are my debt interest rates? What is my expected ROI if I choose to invest? What are my future money goals? By answering these questions, you will have an idea of the best plan and path for your future financial success.

3 Priorities to Consider Before Paying off Student Loans Early

Priority #1: Establish an Emergency Fund

Should you establish an emergency fund or pay off student loans? Hopefully, this is a no-brainer. Your first priority should always be putting money toward and maintaining an emergency fund. Start with always having at least $500 in the bank that is only touched for emergencies. Then, work to save enough money to cover 3 to 6 months of expenses, in case unexpected income or life changes occur. You might think having 6 months worth of expenses stocked away in the bank is overkill. And for some, it might be, especially if other debt is involved. As we continue to answer these questions, keep in mind that everyone’s situation looks differently. So remember to do what makes sense for you and your individual situation. By maintaining an emergency fund or (ideally) a 6-month cushion, we can avoid getting into (bad) debt in the first place.

Priority #2: Start Investing for Retirement Now

Take advantage of employer 401(k) retirement matches. Most employers will match a percentage (usually between 1% and 10%) of money you contribute to your retirement. This is essentially FREE MONEY! Would you ever turn down free money if someone walked up to you with an envelope of cash and said, here’s my contribution to your retirement – no strings attached? NO. So if you’re not taking advantage of this free money for your future, do it now. Next, how much should I be contributing to my retirement? The short answer is, at the very least, contribute as much as your company matches. Again, it’s free! Then, contribute as close to 10% of your income as possible to your retirement account.

Priority #3: Knock Out Bad Debt – Good Debt vs. Bad Debt

You might believe that all debt is bad. This isn’t the case – there is both good debt and bad debt. Examples of good debt include, mortgages (hopefully, one that you can afford), low interest loans (i.e. for an affordable car), student debt, and debt to make money (i.e. investment property loans). Examples of bad debt include any high interest credit cards (usually between 12.99-24.99%) and personal loans.

Analyze your debt and respective interest rates. Pay off your high interest credit cards first. Student loans typically have the lowest interest rates, between 2% and 8%, out of any loan. If you’re rushing to pay off your student loans early, reconsider your strategy and tackle those high interest loans first. After paying off those pesky credit cards, feel free to start making larger payments to your student loans, if you’re eager to eliminate all debt.

Should I Pay Off My Student Loans or Invest?

Once you’ve created an emergency fund and paid off all your high interest loans, your next question may be, should I pay off my student loans or invest my money? The simple answer is to calculate your expected return on investment or ROI, to determine if it will be higher or lower than your loan interest rate. If your interest rate is higher than your expected ROI, pay student loans first. If your ROI is higher, then invest your money. For example, if your student loan interest rate is 4% and your expected ROI is 7%, it would be wise to invest. Keep in mind your own individual variables like, employer investment match options, tax deductions, etc., as you decide where your money should go.

Investing in Real Estate – Even with Student Loan Debt

Waiting to invest in real estate because of student loan debt can be a waste of time, because (1) chances are your student loan interest rates are low and (2) your ROI potential when investing in real estate may be higher than your loan interest rates. That said, those of us still burdened by student loan debt may be hesitant to invest at all. However, many young real estate investors are choosing to put their money toward purchasing an asset that will produce monthly cash flow and, down the road, a larger payout upon resale. If you can muster enough patience to sit back and watch your investment and equity grow over time, chances are you’ll find yourself in a solid financial situation. The key here is delayed gratification. As the real estate market continues to ebb and flow, just like stocks, it’s essential to not panic and keep your focus on the long-term payoff.

Having someone else, like tenants, pay rent each month, will build instant equity on your investment property and possibly provide even more passive income to pay toward your student loans or other debt.

Paying Off Student Loans with Passive Income

Picture this, you are recently graduated, working at your first “real” job, making a decent salary and starting to consider how to pay off your student loans. Instead of paying your student loans every month and slowly chipping away at your debt, you put that money toward a rental property. Now, your tenants are paying your entire mortgage and then some, each month, while also building equity on your property. What if your passive income also paid for your entire student loan payment each month.

More and more consumers are using investments to pay off debt. Just make sure you do your due diligence when deciding what and where to purchase. Does a single-family or multi-family home (i.e. duplex or triplex) make the most sense? If it’s a duplex, do you want to live in one of the units you’re purchasing or rent out both? Again, run those numbers. If you’re interested in learning more about strong housing and rental markets in the U.S., you may like this article: The Best Places to Buy Rental Property.

Do Student Loans Affect Buying a House?

It all depends on your debt to income ratio. If you strike out the first couple of times applying for a mortgage loan, look for alternative lending options, like private money lenders, hard money lenders, home equity loans, and crowdfunding/syndications. At the very least, you will have a better idea of what it’s going to take to qualify for the loan you want. Also, check out my next article for a more in-depth look at buying a house, even with student loan debt.

The Effects of Student Loan Debt on Real Estate

How is student loan debt affecting home ownership and the real estate market as a whole? For starters, millennials are putting off buying a home for up to 10 years, due to student loans. Because real estate is dependent on new investors, this could pose a problem for the real estate market down the road. Currently, there are more than 50 million millennials working in the U.S., with 70% of them paying off student loans. While many are still choosing the traditional route of knocking out student debt before even thinking about investing, let alone buying property, there continues to be substantial benefits to investing your money to pay off your debt.

Pay Off Student Loans or Invest: What To Do Next?

No matter how or where you choose to spend your money, there’s no reason not to invest simply because you still have student loan debt.

The truth is, you don’t have to decide between paying off student loans or investing. You can do both by investing your money and using the returns as a way to pay off your student loans. 

An important rule of thumb when investing, whether it be in retirement, the stock market, or real estate, is to run the numbers. By doing so, you will be able to determine the best investment strategy for you.

Check out another article as part of our ‘College Series’: How Much to Save for College: Preparing For the Future.  


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