Should I pay off my student loans or invest?
I have $25K in student loans at 5.5% interest. I also have $10K in savings and I'm 26. I've been putting $500/month into index funds. Some people say I should pay off the loans first, others say invest. I'm confused. What makes more sense?
1 Answer(s)
This is one of the most debated questions in personal finance and the answer depends on your risk tolerance, but here's the math. At 5.5% interest, your loans are costing you $1,375/year on $25K. The S&P 500 has historically returned about 10% average annually, so investing $500/month would likely earn you more than 5.5% guaranteed.
But here's the catch: the stock market isn't guaranteed. The 10% average includes huge crashes. Paying off debt is a guaranteed 5.5% return. If you can't sleep at night with debt, pay it off. If you're comfortable with risk, invest.
A middle ground: do both. Put $300/month toward loans and $200/month into investing. This gives you guaranteed "returns" from the loan payoff AND market growth.
However, if your loans are above 7% interest, pay them off immediately. If below 4%, invest. At 5.5%, you're right in the middle — do what helps you sleep better. Either choice is better than doing nothing.