Pay Off Your Student Loans Early Or Invest?

Student loan debt is a real problem for many young Americans. According to Federal Student Aid the total outstanding federal student loan debt: $1.5 trillion.

This is a staggering amount of debt. If you are like most of the millennials I know you begrudgingly set up auto pay and bite the bullet for 10+ years.

But as you advanced in your career and find extra money laying around you will undoubtedly consider paying extra on your student loans so you can be rid of them sooner.

A couple of years ago, I did exactly that. I was paid ahead 6-9 months on my student loans and it felt awesome. I felt like I could make a big dent in my student loan amount and get rid of the loan sooner which would free up more of my money.

My plan was to invest the extra money I had laying around after my loans were wiped out.

But after educating myself on personal finance some more I realized this was a mistake.

Instead, I should have been investing that extra money so it could compound and grow over more time.

You SHOULDN’T pay off your loans early

Here are 5 reasons to not pay off your loans early. This is just my personal opinion and you will have to decide if this makes sense for your current situation.

You aren’t building wealth for yourself

When you make extra payments you are kissing that money goodbye 👋.

That money has 0 chance of growing or working for you. You are effectively taking 4%-8% (typical return from common investments) away from your future self.

Instead, you could take those extra payments and put them in a low-cost index fund or mutual fund. I recommend Vanguard.

You aren’t paying yourself first

This is a big one to me. When your paycheck comes in, you should take care of yourself first. I know it’s scary to think about debt collectors. But, if you don’t invest in yourself no one will. You can live your entire life just making enough to pay others. Don’t think that way.

Instead, find a way to make enough to pull money out of your paycheck to do things like

  • Invest in your health with a gym membership
  • Invest in your future and buy books
  • Invest in your family and set up a 401k
  • Invest in your relationship and save for a trip

If you aggressively pay down your student loan balance you are giving away money that could be invested in yourself.

Your student loans aren’t going anywhere

Just accept your student loans as a part of life. Paying them off early might feel like a good idea but you will likely always have debt.

Once your student loans are gone you will have a house payment and then a college fund and then a new car.

Unless you are one of those people who embrace frugality and minimalism you will always be in debt.

Accept it, acknowledge it, and invest in yourself.

Tax benefits

There are limited tax benefits you receive from paying your student loans. After you hit the maximum deduction for interest there are no other benefits to keeping Uncle Sam’s hands out of your pockets.

You could invest in an HSA or 401k to see more tax savings.

Again, invest in yourself first.

In conclusion

I think I have hit on the topic long enough. Don’t make extra payments on your student loans, take that extra money and invest in yourself.