Pay off student loans or invest? How do you decide?

Waiting to invest can mean missing out on years of compound interest growth. In fact, waiting 10 years to get started could mean the difference between them to retreat From 500,000 euros to more than 1 million euros.

So when you have extra money In your budget, does it make sense to pay more on your student loans or invest them?

Here are some things to keep in mind when making this decision.

Should You Pay Off Student Loans or Investing: First Ask About the Interest Rate?

The first thing to compare is the interest rate(s) and potential rate of return.

You may have heard that the Pay off your debts It gives you a guaranteed rate of return. Credit card refund that charge you an annual interest rate of 15%, for example, and it’s as if you’re getting an annual interest rate of 15%.

Things are a little different when it comes to low interest student loans; You may only see a guaranteed “return” of 5%, depending on your interest rate.

How does this compare to the return you could get? Stock market ? Historically, the average annual return for the S&P 500 has been around 10%. However, it should not be assumed that you will get this type of return every year.

In some years, yields can be very high. Other times, you will see losses; Think back to 2009, when stocks plummeted in the aftermath of the 2008 financial crisis.

economic inflation It also makes the 10% figure misleading. Consider your returns over 20 or 30 years: Hopefully, your money has grown, but due to inflation, it’s worth a little less than when you invested it. Once you take this factor into consideration, your annual return on stock investments could be less than 6 or 7%.

No matter what you invest in, you will not get regular and consistent returns every year. Instead, you should focus on the cumulative growth of your investments over several decades.

Lower interest rates make investing more attractive

Deciding whether to pay off student loans or invest is a balancing act. If you have lower interest student loans, you are likely to get better returns Invest your money.

One way to lower your interest rate is to refinance. When you refinance a student loan, you get a new loan from another lender, which pays off your old loan(s). This debt will come with a new (hopefully lower) interest rate and different repayment terms.

Refinancing can reduce the amount you pay in interest while leaving more money in your investment budget. With a much lower interest rate, you will get more value for your investment.

Keep in mind that refinancing is generally only a good option if you have strong credit, a stable income, and can afford your payments reasonably well.

In effect, refinancing a government loan means that you forgo government protections such as income-conditional repayment plans, deferral or forbearance, and some debt relief programs.

So consider refinancing only if you know you will not need to use these programs or if you are refinancing private loans.

Don’t forget about tax benefits

High interest debt with no tax advantage (such as credit card debt) should be paid off as quickly as possible. But some types of debt, including student loans, qualify for a tax deduction.

If you can claim a tax deduction for the interest you pay on your debt, it will be cheaper — and the investment benefit is greater.

You can also take advantage of a tax advantage by investing. When you invest in tax-advantaged retirement accounts, such as PEA, you get special benefits. This allows your money to grow more efficiently over time.

It is possible to take advantage of a discount for student loan interest and your investment contributions. Both of these deductions can reduce your taxable income, thus lowering your taxes. This deduction also decreases as your income increases.

By focusing on growing your retirement account rather than prepaying student loan debt, you can reap greater benefits.

Suppose you have an extra $300 a month. By placing them in a PEA account, you reduce your taxable income by 3,600 euros for the year. Plus, you have the potential to see significant gains over time.

If you pay off your student loan debt, you can save some interest and shorten the debt repayment period, but you lose out on the investment gains.

Should you pay off your student loans or invest: Can you handle the debt?

For some borrowers, choosing to invest while paying off student loans is a simple decision. They take comfort in the fact that they are saving for their future now, rather than putting it off.

Others, on the other hand, have much more difficulty accepting the concept of debt. Sometimes it’s not the numbers that matter – consider your comfort level. If you still have student loan debt keeping you up at night, it might be a good idea to just focus on your debt for the time being.

The bottom line is that you will do better in the long run if you start investing as early as possible. Pay off high-interest debt, then start investing while you deal with low-interest, tax-deductible debt.