Looking to Invest? Try Paying Off Student Loans

Michael Lux Blog, Student Loans 1 Comment

Many Millennials are risk averse when it comes to investing.  Having been subjected to the large market crash of the great recession and the ensuing terrible job market, it makes sense.  Many people saw their retirement shrink, or worse yet, dealt with long bouts of unemployment.  As a result, the appeal of the stock market has lost its luster.  Guaranteed returns are preferred.  Savings bonds are routinely selected over index funds.  Most millennials know they have to save a lot to ever see a retirement, and though the stock market could help get their quicker, it could also take much of the gains away in an instant.

The Best Investment for Millennials…

Student loan interest rates run a wide range.  They normally start about about 4% and can go as high as 18%.  For anyone with student debt, paying down this debt is the financial equivalent of a guaranteed return at your current interest rate.  That means if you have a loan at 6% interest, any payment you make on it is a good as an investment that generates 6% of value each year.  6% guaranteed.  In the current low interest rate economy that we are now in, any investor would jump at that opportunity.  Zero risk and a huge reward.

The Bonus

Paying off student debt has many perks that other investments don’t carry.  Getting Sallie Mae out of your life, not only lowers your monthly expenses, but can remove a great deal of stress.

Eliminated student debt from your credit report can also help your credit score.  In fact, paying off this debt can help you buy a home.

Almost all other investments have purely financial value, and very little external value.  Paying off student loans are a huge exception.

What about retirement?

Paying off debt at 8% will get you much closer than earning a return at 4 to 6%.  However, it isn’t always that simple.  With tax breaks for 401(k)s and employer matching programs, the math can be much fuzzier.  If you get any of these perks, be sure to look check out our article on Paying Student Loans vs Saving for Retirement: Factors to Consider.

The Bottom Line

Earning investment income may seem more exciting than paying off student loans.  It may also feel like you are getting closer to retirement.  But from a dollars and cents perspective, paying down student debt is often the most effective investment strategy.