Paying down student loans versus adding to retirement
Many people question the best use of expendable income as to whether or not additional payments should be made toward student loan debt or if those extra funds should be allocated toward savings or investments. If you have a reasonable expectation of high returns in the market the question becomes debatable however, if you are paying high interest, have a high balance or have unpredictable cash flow it is more than likely more prudent to try to pay down the student loan debt faster.
Here are some pros and cons for paying down the student loan debt or investing:
Pay down the student loan debt
Pros:
- You’ll save money in interest.
- You’ll become debt-free sooner.
- Your debt-to-income ratio (DTI) will improve, making it easier to qualify for a mortgage or other credit.
Cons:
- Can take several years to pay off your student loans, even with extra payments.
- It’s unnecessary if you’re working toward loan forgiveness or repayment assistance.
- You won’t be able to maximize the student loan interest deduction on your taxes.
Best for:
- People whose top priority is to be debt-free.
- Borrowers with high-interest student loans (8 percent or higher).
- Borrowers with a variable interest rate.
- People hoping to purchase a home but who can’t because of a high DTI.
Investing
Pros:
- You can often get a better rate of return than most student loan interest rates.
- Investing sooner will help you avoid having to work longer in your older years.
- With certain investment accounts, you can take withdrawals if you need the money in the future.
Cons:
- You may still struggle with your monthly payments.
- Investing won’t help improve your DTI.
- Investing can be extremely risky.
Best for:
- Borrowers with a low interest rate on their student loans.
- Borrowers who are enrolled in a student loan forgiveness plan.
- People who already have investing knowledge.
As always, it is important to evaluating your personal financial picture. There is never a one size fits all answer. Prioritizing all your goals and weighing all of the pros and cons should be your approach. Get in touch with us today if you would like to discuss your debts, savings goals and personal priorities and we can assist you in navigating all of the particulars.