At a Glance

Debt is more than just a financial burden. It’s a psychological weight that most people want to shed as quickly as possible. That’s understandable, but don’t let haste get in the way of progress. In some cases, paying off student loan debt should be a priority, but under other circumstances, investing is the smarter choice.

In this article, you’ll find:

The Case for Prioritizing Student Loans

If you’re buried in student loan debt, don’t wait for government assistance. The Biden Administration has made student loan forgiveness part of their agenda, but Congressional debates on the topic are slowing the process down. Debt settlement for student loans is difficult to get, so don’t count on that as an option either.

Student loan repayment should be a priority if your interest rates are high. This should be a general rule for all debt, including credit cards, which can be paid off with debt settlements if you get in real financial trouble. Defaulting on a student loan, particularly if it’s a federal loan, could affect your annual tax return or even put you in danger of wage garnishments.

Leave your emotions out of this and trust the math. If your student loan interest rate is over 10%, which is the average annual stock market return, put the debt at the top of the list. Lower-interest-rate loans can be kept on a regular monthly payment cycle. Any extra money should be used for investments. We’ll get into that more below.

Options for Paying Off Student Loan Debt

The obvious preference is to make all your payments on time and eventually the student loan debt will go away. That’s called debt management. If that becomes difficult to do, you could try
debt consolidation, which would mean combining your student loan and credit card debt into one loan, hopefully getting a lower interest rate and smaller monthly payment in the process.

Related: Debt Management Plan Pros and Cons

Debt settlement is not a recommended option for student loan debt, but debt relief might be available from your lender. Contact them the moment you start to fall behind to see what they can offer. You may need to prove a financial hardship to qualify. There are also government programs that may offer you student loan debt forgiveness, which could be worth looking into.

Related: Debt Settlement vs. Debt Management

The Case for Prioritizing Investments

Once again, trust the math. The stock market goes through “bullish” and “bearish” periods where returns are either higher than average or lower. During a bull market, which is when the stock market is rising, it’s better to invest than focus on debt. During a bear market, when returns are not as high, you might want to make extra debt payments.

The stock market has averaged an annual return of 10% over the past one hundred years. That’s not likely to change any time soon. There will be bull markets and there will be bear markets. It all averages out as the years go by. Even if you do prioritize debt, you should always invest something each month, so you’ll be able to retire comfortably.

Should I Pay Off Student Loans or Invest?

The student loans vs. investing question is a simple equation. Look up the year-to-date market return for the S&P 500. It’s easy to get for free on Google or Yahoo Finance. Subtract your student loan interest rate from the average market return rate and you’ll have your answer. A positive number means that earnings are higher than losses from interest payments.

All of this is assuming that you have a choice in the matter. If there’s only enough money to make the necessary payments on your student loan debt or invest, pay the student loan debt first. Once it’s paid off, you can focus on investing. When even that gets difficult, consider debt consolidation, debt relief, or debt settlement, in that order. Follow these guidelines and you’ll be okay.

Frequently Asked Questions

Should I drain my savings to pay off student loans?

Only if you have no other choice. Savings should always be kept separate from both debt payments and investing. Your savings account is your emergency fund. Draining it could leave you vulnerable if you experience a financial hardship.

Should I pay off student loans early or invest?

Investing is almost always the better option because invested money makes money for you. The one exception to this is when the interest rate on your student loans is higher than the average rate of return of the stock market.