Pay off student loans

Should I Pay Off Student Loans or Invest? Bottom Line

pay off student loans or invest

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While it’s common to wonder if you should pay off student loans or invest your money, the answer isn’t so straightforward. To a large extent, your decision depends on your financial situation, personal goals, and the interest rate attached to your student loans. We’ll take a closer look at these important factors so you can decide whether you should pay off student loans or invest for the future.

Should I pay off student loans or invest?

You should always make the minimum payments on your student loans so you don’t fall behind. But if you have some money left over after that, you might be wondering whether to pay off your student debt faster or put that money toward retirement. But before thinking about either goal, we suggest doing something else first: setting aside money into an emergency fund.

1. First, build your emergency fund

It’s always a good idea to “pay yourself first,” especially in these uncertain times. By setting aside some money into an emergency fund, you’ll have a financial cushion to fall back on if you lose your job or run into an unexpected expense.

Most experts suggest aiming for an emergency fund that would cover three to six months’ worth of living expenses. This might feel like a tall order, but you can work toward it over time.

Figure out what your target goal is, and decide how much you’d need to set aside on a weekly or monthly basis to achieve it. If possible, set up automatic withdrawals from your checking to your savings account.

Once you have your emergency fund in place, you can start to think about whether to use your extra money to pay off student loans or invest.

2. Compare interest lost with interest earned

So, does it benefit your finances to pay off student loans or invest? That all depends on how much you’d spend on interest vs. how much you could earn on interest.

Student loans accrue interest all the time, so you end up spending more on your loan than you borrowed in the first place. Investments also accrue interest, but this is interest you’re earning, not paying for.

While you can’t predict what the rate of return on your investments will be, an average rate is about 6%. If your student loan interest rate is lower than 6%, you’d probably earn more from investing your money than you would from paying off your loans ahead of schedule.

But if your student loan rates are a lot higher, it might be worth getting rid of that debt first so it doesn’t keep eating up your money. Search for an “invest or pay off student loans calculator” so you can compare the numbers.

Use an “invest or pay off student loans calculator” to crunch the numbers

With a calculator that compares investing with debt payoff, you can compare the numbers. Let’s say, for example, you have an extra $300 in your budget every month.

Here’s how much you’d save by putting an extra $300 toward a $35,000 loan at a 5.5% rate on the standard 10-year plan:

Loan amount

Interest rate Required monthly payment Extra monthly payment Time saved 

Interest saved

$35,000 5.5% $383 $300 ~5 years



Here’s how much you could potentially earn over 20 years if you invested that money:

Current retirement savings

Projected annual rate of return Current monthly contribution Extra monthly payment Years contributed

Final amount increased by…

$5,000 6% $200 $300 20 years



As you can see, investing that extra $300 could potentially boost your retirement savings by more than $50,000. Of course, this requires 20 years of saving, whereas the interest savings from your student loans are more immediate.

But if you’re starting to save for retirement while you’re young, your money has time to grow into a nest egg that you can rely on later in life. Don’t underestimate the importance of starting early when it comes to saving for retirement!

(Remember, that 6% rate of return on investment is just an estimate; there’s no way to predict what your returns will be.)

3. Make the most of a company match

If you work for an employer that offers a 401(k) match, you should invest at least enough to get the full match (if you can afford it). Why?

Well, a match is basically a 100% rate of return on your investment, which you’re not going to get anywhere else. If you’re not maxing out your employer benefit, you’re basically turning down free money.

Even if you’re eager to get rid of your student loans, it’s a good idea to invest at least enough in your 401(k) to get your full company match.

Then, you can decide whether to invest even more of your paycheck or to use the funds to pay down your debt.

4. Pay off high-interest debt before student loans

Besides paying off student loans and investing, you also should consider any other debts you have. If you have credit card debt, for example, paying it off should probably be your priority.

This is because credit card debt comes with high interest rates, often of 15% or more. Personal loans can also come with relatively high rates.

Even if you hate having student loan debt hanging over your head, it makes more financial sense to pay off high-interest debt before tackling your student loans.

5. Take advantage of student loan tax deductions

Another reason student loan payoff might not be a top priority is because of the student loan interest tax deduction that comes with paying off student loans.

Most borrowers can take a tax deduction of up to $2,500 if they’re paying off student loans. This deduction can save you some money, making the decision of whether to pay off student loans or invest tilt in the direction of investing.

6. Explore options for student loan forgiveness

Another thing to consider is whether you could qualify for student loan forgiveness. Programs such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness could forgive all or part of your student loans in exchange for qualifying work.

Some states also have student loan repayment assistance programs for certain professionals. And more and more employers are helping their employees pay off student loans with a student loan matching benefit.

If you’re considering student loan forgiveness, it might make more sense to invest your money than pre-pay your student loans right now.

7. Refinance your student loans for lower rates

If you’ve got high rates on your student loans, you might be able to refinance them for a lower one, just as you can with a mortgage or an auto loan. Refinancing lenders such as CommonBond and SoFi offer rates starting as low as 1.76% (as of April, 2020).

Even if you’re working on paying off your student loans quickly, you could save yourself time and money through refinancing for lower rates. To qualify, you need to have strong credit and a source of income.

You also need to be careful about refinancing federal student loans if you need any federal benefits, as refinancing turns them private and thus ineligible for programs such as income-driven repayment or PSLF.

If you can refinance to a low rate, your student loan repayment could take a backseat while you focus on investing or paying off other debts.

8. Figure out what your personal goals are

As you know, personal finance isn’t just about the numbers — it’s also about your personal goals and preferences.

If you’re someone who hates having student loan debt hanging over your head, you might do all you can to pay it off faster, regardless of what the numbers say.

Or if you’re juggling multiple priorities, such as saving for a house or for your kids’ college funds, student loan repayment might have to get put on the back burner for the time being.

So when thinking about whether you should pay off student loans or invest, don’t forget to consider the whole picture of your finances and goals. That way, you can come up with a plan that makes sense for all parts of your life.

Pay off student loans or invest: Find a balance

Investing for retirement is important, whether you’re starting young or have already been in the workforce for a while. But you’re probably also eager to get out of debt and say goodbye to those monthly student loan payments.

If possible, try to find a balance between these goals that makes sense for you both financially and personally. Both goals might take a long time, but by being thoughtful about how you allocate your money, you can set yourself up for financial health and well-being down the line.

Want better rates? Here are the best banks to refinance student loans:

Variable rates start at...Fixed rates start at...Repayment termsWelcome bonus Check your rates
refinance student loans4.54%4.49%5 - 20 years$200Visit LendKey
refinance student loans4.99%4.47%5 - 20 years$200Visit Earnest
refinance student loans4.22%3.97%5, 7, 10, 15, and 20 years$120Visit Laurel Road
refinance student loans4.53%4.40%5 - 20 years$100 or $200, depending on the amount you refinanceVisit Credible
refinance student loans5.09%4.74%5, 7, 10, 15, and 20 years$100Visit SoFi
refinance student loans4.53%4.83%5, 7, 10, 15, and 20 years$100Visit ELFI