This website has already discussed certain situations in which it does not make sense to pay off student loans early. In addition, the website has also explained how sometimes it is not wise to pay off student loans even though you may have money available to devote to student debt. Of course, if you can make more money investing cash than the interest that would be offset from paying off student loans early, it is usually best to simply invest free cash. However, it can be very tricky to determine when you should invest available money rather than pay off student debt.
At the onset, it is important to relate that it never makes sense to invest available money if you need that cash to make monthly student loan payments. Investing is inherently risky, and you should not take a chance on losing money if you need cash to stay current on your student loans. However, if you have available money separate from cash you need for monthly student loan payments or your emergency fund, you can consider investing this available money.
Sometimes it makes sense to invest free cash rather than pay off student debt, regardless of the interest rates on your student loans. During my student debt repayment saga, I always had nearly five figures of cash invested in the stock market. This money was separate from the emergency fund I set aside for a “rainy day,” since I did not want to risk losing my money in the market and not have cash available if a life emergency occurred. The effective interest rate on my student debt was around seven percent, but I figured that with some wise choices, I could make more than seven percent on my investments.
Of course, I paid off my student loans during one of the biggest economic recoveries on record. The stock market has seen unbelievable gains over the last decade, and nearly all reliable stocks have increased in value over the past several years. While I was paying off my student loans, you could practically pick stocks at random that would increase in value more than seven percent a year. Indeed, I far exceeded this amount, and I used any cash I made from investing to pay off student loans and add money to my emergency fund.
We are definitely not currently in an era in which someone could reliably make a significant gain in the stock market. As such, I would not recommend that anyone invest available money if the effective interest rate on your student debt is around seven percent or higher. It is too unlikely that you could make more money from investments than the interest that would accrue on your student debt. However, it is important to recognize that there are some periods in which it unequivocally makes sense to invest at least some available money rather than pay off student loans early.
As I have previously mentioned on this website, another situation in which you might invest available money rather than pay of student debt early is if the effective interest rate on your student debt is around three percent. Some individuals with private loans might have low-interest student debt from the start. In addition, as this website will soon discuss in more detail, some borrowers can refinance their debt at interest rates close to this percentage as well. The reason why it might not make sense to use available money to pay off low-interest debt is since the inflation rate is around three percent. As a result, there is not much of a penalty to just keeping this money available rather than paying off student loans.
For everyone else, it is more difficult to decide if you should invest available money rather than pay off student loans early. The lower the effective interest rate on your student debt, the more likely it is that you will see better returns through investments than the interest that would accrue on your student loans. Of course, the economic environment will also be important in determining whether you should use extra cash to pay off student loans, since this will have a massive impact on the returns you can realize from investing.
In addition, your personality will also be a key factor when assessing whether to invest available money rather than pay off student debt. My student loans stressed me out in unbelievable ways, and I did everything in my power to pay them off as soon as possible. However, if you are not stressed out by student debt, and don’t mind taking a risk, then it might make more sense to invest available cash.
Furthermore, it should be mentioned that you do not need to simply invest extra money in equities or another traditional investment product. I have friends with student loans who used available cash to start an Airbnb business, buy an apartment building, and open a yoga studio. These friends have all told me how happy they are with their life decisions, and student loans should not impede you from investing in things that could better yourself.
Although I made every effort to pay off my student loans early, this approach is not for everyone, and available cash can be devoted to a number of purposes other than repaying student debt. Indeed, it sometimes make sense to invest extra cash you might have, since investment earnings might exceed the interest that would accrue on your student loans.