Investing in my Roth now or paying off student loans
 

So I'm graduating from college in a few months and bracing for an influx of graduation money as well as taking home some bank by working a lot of hours over the summer. I was originally planning on paying off all of my student loans as soon as I could to avoid any interest building up, but with the Total Stock Index so inexpensive (the index where my Roth IRA invests into) I may be able to put the money into that and let the growth outpace the interest that could build up on my student loans (which have a fairly low interest rate). I was thinking about this when I heard another student talking about doing something similar. This may be even more enticing if the market continues to fall over the next half-year, but my decision will be made for me if the stock market starts to rise. I do think this is an opportunity to take advantage of the silver lining in the dark economic mess and invest now. What do you guys think?

Do you get tax breaks on the interest you pay on your student loans?

Yes

Tax deduction or not, I'd go heavily with investing in your Roth right now. The interest rate on your loan is favorable. And you, and lots of other people, realize that the market is at or near a historic low.

I'd even go further, and split your investment between the very long-term Roth, and an intermediate term, 5-10 year, portfolio.

I agree with braisler. You could probably easily beat the interest cost of the loan with the interest earnings on the Roth.

That is what you need to figure out. Include the tax deduction savings on the interest on your loans and you'll find that you aren't paying as much in interest as you will likely earn otherwise.

Heck, I'm delaying repayment on my home equity line of credit (paying off, just more slowly) because of a similar situation. The interest rate on my HELOC is 5% right now. I can name 5 stocks off the top of my head that have a dividend better than 5% right now. And that is just the dividend payout. Some of those stocks going to appreciate over the next few years as well.

In case you are interested:

Frontline (FRO) - Dividend = 35% (yeah, seems ridiculously high, but I've owned them for years and they always pay)
Pengrowth Energy (PGH) = 16%
Eli Lilly (LLY) = 5.78%
Pitney Bowes (PBI) = 6.03%
Verizon (VZ) = 5.66%

That quick list covers a variety of sectors, earns you dividends, and positions you for growth during a market rebound.

This sounds like a question for Carmen Wong Ulrich. Actually, I think I've heard her answer a similar question before. Education loans are "good debt" (so long as they're federal loans, not private loans; if you have any private loans, I would advise paying those off ASAP because the interest rates can be variable) and so they can wait while you invest in other things (by wait I mean you don't need to pay more than the expected payment). You will have a 6-month grace period for your loans post-graduation. Take advantage of it, but don't forget to budget for your loan when the time comes.

The tax deduction for interest paid is only up to $2500 if you make under $55,000. It's less than that if you make more, and if you make over $70,000 a year, you're not eligible for the deduction.

The beauty of a roth is also that you can pull out your contributions later without penalty, while your earnings stay invested to retirement. If you only plan to leave your contributions in for a few years, then consider c class shares.