If you’re a fairly new salaried professional with big student loan debt on your shoulders, looking for ideas to manage your finances better, you’re at the right place.
The first time you get your hands on a bulk amount (your salary), things might get a little overwhelming. Some of your colleagues might already have started investing, some might be working on paying off their student loans, some might not do either of these and spend on other important things, etc. But the major outflow of money would either be toward paying off student loan debts or investing.
Which is a wiser choice and why?
Honestly, there’s no straightforward answer to this and it depends on various factors as discussed in length below.
Factors to consider
Interest Rates
Comparing the interest rate of the investment plan you’re going for and your student loan interest rate is essentially a determination of better returns. You should invest if the rate is higher than the debt interest rate. This is probably the most important and only factor that commoners consider before choosing to invest or pay off debt. Comparing the principal amounts while deciding is also crucial.
One other important aspect that needs to be taken into account is that your investment returns aren’t guaranteed. Even when you’re investing in a very low-risk plan, you’re not taking zero risks. So, be aware of the risk factor involved.
Student loan forgiveness programs
Most people overlook this particular lifesaver when it comes to repaying your student loan debt. There are several student loan forgiveness programs that you can qualify for (find out how here), to help waive off all or part of your loan.
Be careful while reading the guidelines for the programs. In some cases, the forgiveness amount is considered as taxable income. So, it’s better to hold off on paying your student loan debt to enjoy the benefits of forgiveness programs to their fullest and probably use that money to invest.
Refinance Rates
Refinancing your student loan can help you save a lot of money. Here’s how it works – a new private company offers to pay off your existing student loan debt at a much lower interest rate. A loan to pay off student loans in other words. This can help you save a lot of money in the long run, especially when it comes to handling big figures like student loans, and also makes the whole repayment process quicker. Compare the refinance rates of various lenders and choose the best one for you.
Tax deductions
In the US, a 401k plan is a retirement plan that allows eligible employees of a company to save and invest for their retirement on a tax-deferred basis. Only an employer is allowed to provide a 401k for his/her employees. This amount varies from company to company and is capped at a certain percentage of the employee’s salary. Making use of this plan is an easy way to ensure automatic investment at regular intervals.
Other financial priorities
While deciding between paying off a student loan or investing, one can often overlook or underestimate other financial priorities. Here are some major probable expenditures you have to prepare for, before thinking about either the student loan or investing.
- Emergency funds – You never know when you’re going to have a medical emergency or immediate need for funds, so it’s crucial to allot some money every month for emergencies.
- Other high-interest debt – When you’re starting to live entirely on your own, you might have other high-interest debt like credit card balances or personal loans. It’s wiser to pay these off first and then go for student loan debt and investing. This also ensures that your overall returns are higher.
- Retirement Savings – It’s always wise to start saving up for retirement at an early stage. Some extra money in your savings account is not going to hurt, is it?
- Life Goals – You might have other major life goals like buying a house, getting married, having children, etc. Saving for these should take precedence.
How to start investing while paying off a student loan – some tips
Paying off a student loan and investing need not be mutually exclusive, they can very well go hand in hand. With proper planning and dedication, you can manage both efficiently.
- Check out investment apps – There are various apps like Acorns or Stash that allow investors to invest with as little as $5 and are great for beginners who need help in managing their investments.
- Hire brokers – A stockbroker is a person who buys/sells shares on your behalf. There are many low-cost or even free brokers available online who can manage your investments beautifully.
Final Word
Deciding between paying off a student loan or investing ultimately comes down to whichever is better for you and it varies from person to person. Keep in mind that while investing, you run the risk of losing your money. If you’re a person who feels mentally agitated if you don’t pay off your debt soon, go ahead and pay it. You shouldn’t lose your peace of mind over money. If you’re knee-deep in investing, just make sure you’re paying your minimum loan amounts every month.
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