limited

I'm still a sophomore in college, so I have a few years left before I have to deal with this problem, but I've been talking to a bunch of my friends who are going to be graduating in a few months. The question is wheter its better to pay off your student loans as soon as possible and be debt free, or to take advantage of the low fixed interest rates on student loans, and invest the money. The interest rates on the loans are about 3-5% right now, and honestly, I think one would be hard pushed to find an investment that offers a high enough return to stay ahead of the loans.
I'm curious to hear other people's opinions, especially how they feel about remaining purposely in debt and how that might affect you.

onetime2

Personally, to me being in debt isn't necessarily a bad thing. It can help build credit by proving that you're financially responsible. Especially when you don't have much of a credit history.

In the end it's a very personal choice. Investing in an S&P index fund or the like will get you around 10% return per year on average but it has some risk. Paying off the loan has no risk, you basically save the interest payments over the life of the loan. BUT, paying off the loan has no upside either. The S&P index fund could give you more than a 10% return if your timing is right (or lucky).

There's no reason that you couldn't do a little of both. Throw some extra money at the student loans each month and throw some money into some investments.

Now, if you're gonna throw in other real life factors like car loans, credit card debt, and the like, that's a different story. Typical car loans have higher interest rates than student loans and credit card rates are usually about twice that. So, I'd put paying off credit card debt at #1, throwing a little extra money at your car payment at #2 (while also throwing a little into investments), and upping the student loan payment a bit at #3 (also while investing a bit at the same time).

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Averett

I'd say pay off those student loans. But that's just me.

I was "lucky" and was able to pay them all off after I got money from the insurance company after a car wreck. I'm so glad I don't have that bill every month, along with all the others I have to pay.

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Daval

Personally, I'd pay off all the debts first...

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Force 10

Here's how I look at it. What's making you more money. If investing is returning you more interest then the student loan is charging you interest, then invest. If not, then don't.

In other words:
Student loan 4.2%
Investing 8%

Makes more sence to invest.

However, I don't always practice what I preech either. I, like Daval, tend to enjoy being debt free at most costs ;-)

poof

As other posters said, pay your debt.
<i>Student loan 4.2%
Investing 8%</i>

8% return, yet you owe? I say bullshit! If you have the money to invest, you have eliminated debt first
(that is why you have money to invest).
Common sense? This arbitrary 8% is pulled from some ne'er do well that has never invested in anything more than his ass sitting on the couch studying the worlds problems from a bong and cable tv hasn't a clue!
Where did this magical 8% come from?
Pay your bills on time, and if possible, always pay more than the minimum asked. Then, you have disposable income that you can get that 8% investment income mister Trump talked about above.

Bottom line, pay your bills on time every time, and pay more than the minimum.

irseg

I'd recommend paying off the student loans. I'm paying mine ahead of schedule to save money spent on interest, and because it helps to minimize your debt when it comes to buying a house, car, etc.

poof, I think ruprex was saying *if* you are making an 8% on an investment, then favor it. Not that all investments magically give an 8% return.

Qazwsxedc

i don't know if hte states is the same as canada, but our student loan interest is tax deductible. So if you have any other debt outside your student loans, it's best to pay those off first. I guess in teh end, there's "good" debt and bad debt.

Force 10

Yeah, you'll find me here on my couch with my bong watching cable TV and don't listen to anything I have to say as it's all a bunch of bullshit anyway. your best bet is listen to only one person on this board and never consider everything as a whole.

Force 10

But if you were to consider other avenues of thought, consider this version revised for the layman:

LETS JUST SAY THAT:
Your student loan is 4%, You have an investment that yields 8% (I know there are some people who have no clue how to yield 8% but that's neither here nor there, this is an example)

Here are your options: pay of the student loan right now, then save up the capitol for investing later.

Or, invest and yield the 8%, make the 4% payments to your student loan and pocket the other 4%. Do both at once, pay off the loan and invest. Make your money work; don't work to make your money. It's simple math is all.

saltfish

Is the interest that you pay for student loans tax deductable?

-SF

Force 10

Maybe, depending on your personal situation.

Read all about it here.

Yakk

Stock market:
http://www.evanomics.com/intro/introtsld002.shtml

30-year AAA bond:
http://www.neatideas.com/interest-ra...bond-yield.htm

Historically, you'd expect about 11.58% from investing in the stock market around now.

Assuming a tax rate of 30% and student loans being non-tax-deductable, and a 5% student loan rate:
8.1% after tax return from stock market
-5% student loan
---
3.1% return

At that rate, it will take ~ 23 years for your investment's face value to double, ignoring the requirement that you repay your student loan. If you work in real dollars it will take 57.2 years for your investment to double.

Note, however, that this return rate will fluxuate significantly. Anything from -20% to +20% is reasonable in any one year.

As an aside, current inflation rate (USA) :
http://www.neatideas.com/cpi.htm

If your debt is tax deductable, it is more tempting to invest. However...

Another way of looking at it is, 3 month Tbills are at 0.8%. 5 year AAA bonds are under 4%. Paying off your debt is a guaranteed, flexable rate, investment that is giving you a better rate of return than any other "zero risk" investments you could make.

Then again, at your age it is probably that zero risk investments are a bad idea for you. =)

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Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.

analog

Sometimes sarcasm is the only way to get through to people- and Amen to that.

Boo

Always PAY YOURSELF FIRST! This cannot be stressed enough.

That means getting 6 months of living money into a safe account like a CD. You never know when you need to move, change jobs, cities etc. All this takes money. Face it, Mommy and Daddy are tired of carrying your ass. Get a job, save some money for a rainy day. Don't run up credit cards either.

After you have a steady check, pay yourself 10% into IRA/401K etc. Then you "might" want to pay down your student loans. I personally believe that it depends on your personal priorities, the economy and the interest rates.

Never say no to a 1-3% difference in interest rate or someone letting your use their money for free.

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