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Whether to invest while you’re paying off student loans is a fiercely debated topic in the personal finance world. It’s about half a step below the “should you be allowed to splurge on nonessentials when you have debt” debate. (I vote yes, with moderation.)

Truthfully, the answer is simple: Yes, you should be investing when you have student loans.

Now, buckle up for some actual number crunching. It’s the only way to make a compelling case for why it’s in your best interest to start investing before paying off student loans.

Credit card debt vs. student loan debt

There’s a significant difference between investing when you’re carrying student loan debt and investing when you have credit card debt, also referred to as consumer debt. Your credit card debts probably carry annual percentage rates (or APRs) of 15% to 30%. You’re unlikely to see average returns like that on all your investments from the market in a year and certainly not on average over a longer period of time. Therefore, it doesn’t make sense to focus on investing when you have a debt accruing 15% to 30% in interest, because even with strong market returns, you’d still be losing money.

I’ll break it down with actual numbers.

Let’s say James invested $3,000 in an S&P 500 index fund, and it earned an 8% return for two years. Great! He’s earned $499.20 simply by investing. But at the same time, he was carrying $3,000 in credit card debt at a 22% APR and paying the minimum $120 a month. It would take James 34 months to pay off the credit card debt and would cost him more than $1,000 in interest. He may have earned $499.20 by having $3,000 invested in the market, but the $499.20 he earned from investing minus the $1,000 he paid in interest on his credit card debt means James really lost more than $500 by not redirecting that money toward paying off consumer debt.

By contrast, let’s say Olivia took out two student loans totaling $18,000 carrying an average interest rate of 5.58%. Olivia is required to pay $196 a month, but she pays an extra $54 to make the payment an even $250. She’s making a good salary, so she also puts an extra $200 a month into an S&P 500 index fund with the goal of buying a home in 10 years.

Now we’re going to fast-forward eight years. Olivia has paid off her student loans. The extra $54 a month in payments helped her reduce her loan repayment period from 10 years to just over seven. She forked over $3,969 in interest on top of the $18,000 principal balance owed.

After eight years of consistently putting $200 a month into an S&P 500 index fund, Olivia invested a total of $19,200, which earned an average 7% return over those eight years. Her grand total in the account is currently $24,623.53. That’s a return of $5,423.53. Not a bad return, but there are three things to consider.

First, if Olivia had put the extra $200 a month toward her student loans instead of investing it, she would’ve paid off her debt in just under four years and spent approximately $2,000 on interest instead of the $3,969 she paid. That’s nearly $2,000 she could’ve saved on interest, not to mention being done with payments in about half the time. After subtracting that $2,000, her return is still up about $3,500 from investing, but she probably wouldn’t have invested for all eight years, because…

Second, if Olivia wanted to stay on the time horizon of buying a home in 10 years, then she would’ve needed to move her investments to a more conservative investment around year five. This wouldn’t result in the same kind of returns: She would end up with a portfolio of $13,800 and a return of only $1,800.

Third, market returns may not have been average. Olivia might’ve caught a bear market and had really low returns for five years.

Investing while in debt is a balancing act of evaluating your own risk and debt tolerances, as well as your goals. It can make financial sense to invest while paying off lower-interest debt, but not if doing so keeps you up at night worrying about your debt. Here are some questions to consider when deciding.

When do the experts say it’s okay to be investing while in debt?

There is not one specific interest rate upon which the entire industry agrees, except that if it’s high — especially in double digits — you should focus on paying off your debt first.

“If you have a very low interest rate on that student loan debt, and it’s less than 5% or less than 4%, you might consider investing into the market while you’re also paying that off,” says Julie Virta, senior financial adviser with Vanguard Personal Advisor Services. “We look at it from a financial situation. If you expect your portfolio to earn 6% to 8%, and your student loan debt is at 3, 4, or 5%, maybe you’re better off investing your dollars.”

“We tend to say: Anything above 7% [interest], pay it off.”

Virta does advise considering the climate in which you’re investing. After the Great Recession, the stock market experienced a bull run from 2009 through 2018, but analysts and experts have been anticipating a market correction and less aggressive returns in the coming years. No one has a crystal ball, of course, but always do your research about recent returns before deciding to invest while paying off debt.

“We tend to say: Anything above 7%, pay it off,” says Sallie Krawcheck, CEO of Ellevest. “For context, the stock market on average, since the 1920s, returns about 9.5% annually. Now, some years it’s been a lot better, and some years it’s been a lot worse, but that’s the annual average. We believe a well-diversified investment portfolio should return about 6% annually. That gives you a guidepost.”

“People should have an emergency fund and no high-interest debt before they start investing,” says Alex Benke, vice president of financial advice and planning for Betterment. “You could have mortgage debt and student loan debt, depending on the rate, before investing. Five percent is what we [at Betterment] use as a cutoff on student loan debt.”

That being said, Benke also advises to still take advantage of an employer-matched retirement plan, even if your student loan debt is above 5%. The 5% rule refers to general investing in taxable accounts.

In fact, all the experts I interviewed agree that when you have the option to invest in an employer-matched retirement account, you should do it.

Why are you investing while in debt?

You must never forget the importance of goal setting, time horizon, risk tolerance, and asset allocation. These factors are particularly critical when it comes to deciding if it makes sense to invest while paying off debt. When will you need this money? If you’re on a medium-term time horizon of under 10 years, does it make sense to put risk on the money, or would that money be better served getting you to debt freedom? Can you emotionally handle seeing your investments drop during this period?

Have you considered refinancing?

Refinancing is the act of taking out a new loan to pay off an existing one. It sounds sketchy as hell when you put it that way, but it can be a valuable tool. Let’s say Toru is carrying $20,000 in student loan debt at a 6.5% rate on a 10-year term. He applies and gets approved for refinancing at a 4.5% rate on a 10-year term. Now he can pay less in monthly payments, and he will save more than $2,000 in interest over the life of the loan.

The idea of hanging on to debt for a decade, even when it mathematically makes sense to do so, gives me a low-grade case of nausea.

Unfortunately, refinancing is easier said than done. You may find it’s harder to get approved than you expected or the interest rate you’re offered isn’t as competitive as you’d hoped. Refinance companies don’t readily share underwriting criteria for approval, but the ideal candidates have strong credit scores (700-plus), have completed their degrees, have been employed for at least a year, and have never missed a student loan payment—and it doesn’t hurt if they have a healthy salary.

The downsides of refinancing: You turn federal loans into private loans, which means you lose eligibility for any federal programs, such as debt forgiveness or income-driven repayment plans. Also, with private loans, deferment and forbearance, which allow you to temporarily stop making payments on your student loans due to hardship circumstances, aren’t as easy to come by compared to the options for federal student loans. Student loan refinance companies include SoFi, Earnest, Laurel Road, and CommonBond.

What’s your debt tolerance?

“I really regret paying my debt off quickly,” said no one ever, because debt sucks with a capital S-U-C-K-S.

I can give you all the mathematical reasons why you need to be investing. I can make impassioned pleas about compound interest and the value of having time on your side and how it’s incredibly difficult to make up ground 10 years later, even if you double down on your contributions. But for all my eloquent arguments, your gut might just say, “No, I’m completely uncomfortable with debt, and it needs to be gone at any cost.”

That’s okay. You may have a massive case of debt aversion. I’m one of you too. The idea of hanging on to debt for a decade, even when it mathematically makes sense to do so, gives me a low-grade case of nausea. It’s something I’ve been working on getting over while dealing with my husband’s loans. We’re attacking his debt with a three-pronged approach of moderately aggressive repayment, prioritizing retirement savings, and mixing in some investing.

Ultimately, you do have to decide what the right decision is for you emotionally and not just financially. Just do the future you a favor and consider the financial side a little bit. At least put some money into retirement savings, please.


From Broke Millennial Takes on Investing by Erin Lowry, to be published on April 9, 2019, by TarcherPerigee, an imprint of Penguin Publishing Group, a division of Penguin Random House, LLC. Copyright © 2019 by Erin Lowry.