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When you have discretionary money, you can use these funds to further your financial goals. You can pay off your outstanding student loan debt or invest in the stock market, an IRA, or another fund.
Deciding to pay off your student loans or invest depends on what your financial priorities are. Paying off your loans early will likely save you on interest expenses, though eliminating your loans doesn’t mean you’ll increase your future savings. Investing can potentially position you for a more secure future, but it may be risky and you’ll still have loan debt.
- Prioritize your financial goals first
- Factors to consider
- Why you should pay off your student loans
- Invest in your future
- Tips for investing with student loans
Prioritizing your financial goals
No matter if you have a small amount of loans or an outstanding balance over $10,000, you can use your money to accomplish other financial priorities before paying off your loans or investing, such as:
- Building an emergency fund
- Paying off other debts with higher interest rates
- Using the funds to make necessary repairs or renovations on your property
- Considering any elective or nonemergency medical procedures
- Furthering your education without taking out more loans
- Building your business
Pay off student loans or invest: Factors to consider
As you’re weighing your options, here’s what you should take into account:
Compare the interest you spend with the interest you could earn
A common strategy for deciding between student loan payoff and investing is comparing the interest rates: Your student loan interest rate determines the cost of your debt, while the interest rate on investments impacts how much you might earn.
One way to potentially lower your student loan interest rate is through refinancing your loans. This could save you money on interest charges and even help you pay off your student loans early. In this case, getting out from under your loans before investing might be a good idea.
If you decide to refinance your student loans, be sure to consider as many lenders as possible to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from our partner lenders in the table below in two minutes.
| Lender | Fixed rates from (APR) | Variable rates from (APR) | Loan terms (years) |
|---|---|---|---|
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.9%+ | 5.31%+ | 5, 7, 10, 15, 20 |
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 6.79%+1 | 7.06%+1 | 5, 7, 10, 15, 20 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 6.99%+2 | 6.99%+2 | 5, 7, 10, 12, 15 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 6.0%+5 | 8.03%+5 | 5, 10, 15, 20 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.23%+3 | 5.28%+3 | 5, 7, 10, 15, 20 |
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.9%+4 | 8.12%+4 | 5, 10, 15, 20 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.49%+ | 5.02%+ | 5, 7, 10, 15 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.75%+ | N/A | 7, 10, 15 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.79%+ | N/A | 5, 10, 15 |
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| Compare personalized rates from multiple lenders without affecting your credit score. 100% free! |
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All APRs reflect autopay and loyalty discounts where available | 1Citizens Disclosures | 2College Ave Disclosures | 5EDvestinU Disclosures | 3 ELFI Disclosures | 4INvestEd Disclosures | 7ISL Education Lending Disclosures | 8Nelnet Bank Disclosures |
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Consider the tax deductions for student loan interest
Depending on your tax situation, you might qualify for a student loan interest deduction that could help you decide how to prioritize your financial goals.
The IRS lets student loan borrowers deduct up to $2,500 in interest paid per year for taxpayers with a modified adjusted gross income (MAGI) of $70,000 or less — or a MAGI of $145,000 or less for borrowers who file jointly.
This interest deduction can help reduce your taxable income, leaving you with a smaller tax burden — and possibly more money to put toward your student loans, cutting down your repayment time.
Paying off student loans
It’s a good idea to consider paying off your debts as a top financial goal. Some federal student loans can take up to 30 years to pay off, and you’ll likely pay a significant amount in interest if you’re only making the minimum monthly payment. Once you pay your student loans off, you can use that monthly payment for other goals, such as investing.
However, if you were to raise your monthly payment from $161 to $237, you would pay off your loans in 15 years and only spend $12,720 in total interest. Overall, you’d save $15,257 in unnecessary interest expenses that you can then invest or allocate to other financial goals.
Know your federal student loan benefits
Federal student loans offer valuable protections, such as access to a variety of repayment options as well as student loan forgiveness programs. These benefits could help you decide whether aggressive student loan repayment is the right move.
Paying off your loans isn’t the right option for all borrowers. While it’s important to make payments, you should realize that some borrowers qualify for federal loan forgiveness after making consistent minimum payments for a set number of years.
For instance, the Public Service Loan Forgiveness Program forgives the remaining balance on Direct Loans after 120 qualifying monthly payments are made while the borrower works full-time for a qualified employer. Using the same example above, after 10 years your loans would be forgiven, and you’d only have paid $9,325 in interest.
Refinance your loans
Instead of refinancing your federal student loans, it may be best to consider consolidating them into a Direct Consolidation Loan, which can extend your repayment term up to 30 years and consolidate your loans into one monthly payment. Refinancing your federal loans will cost you your federal protections, so be sure to weigh your options carefully.
If you decide to refinance your private student loans, remember to consider as many lenders as you can to find the right loan for your needs. This is easy with Credible — you can compare your prequalified rates from multiple lenders in two minutes.
Pay off federal or private student loans?
Depending on what type of loans you have, you’ll need to consider the benefits and drawbacks of paying them off early. Federal student loans tend to have more options available that help qualifying borrowers pay off their student loans sooner.
Eligibility requirements vary and are typically reserved for borrowers undergoing significant hardship or those who are employed in specific career sectors such as nonprofits or government jobs.
Private student loans aren’t eligible for federal forgiveness or IDR plans, but there are still ways you can lower your payments. These loans can be refinanced and you may be able to secure a lower monthly payment, a lower interest rate, or better terms that can help you pay as little overall interest as possible.
This reduction in monthly payments can allow you to invest or save while you’re actively paying off your student loans. Whatever strategy you choose, make sure it’s one that you can comfortably afford while making progress on your financial goals.
Invest in your future
It’s never too early to invest in your future, and if you do so responsibly, there’s a higher likelihood of accumulating exponentially more than you invested.
Although this involves a significant initial investment and consistent monthly payments that could be put toward your student loans, this example shows that your savings in 30 years significantly exceed the expenses of repaying a $30,000 loan over the same time span, at the same interest rate.
Of course, investing can wait until you’ve finished paying off your other financial obligations. The goal of investing is to allow funds to grow over a long period of time.
Unfortunately, if you were to make withdrawals from your investment accounts, you’d have to pay tax on the gains. This could cost you even more money if you had to withdraw these funds to help pay for your loans in the future.
Tips for investing with student loans
Deciding if and how to invest while repaying your student loans can feel overwhelming. Thankfully, there are multiple options that you can try. You can also change your strategy late if you decide to allocate more funds toward your investments or student loans.
Here are a few tips that could make it easier to invest while having student loans:
1. Decide how much you can invest
By creating a solid budget, you can figure out exactly how much you can afford to set aside for investments.
- Start by comparing your income and expenses. To have a balanced budget, you need to spend less than you bring in.
- Add up both your fixed and discretionary expenses. For example, fixed expenses would include rent and car insurance, while discretionary expenses would include entertainment and travel.
- Subtract your expenses from your income. This amount is how much you can afford to invest. Finding ways to lower your discretionary spending — such as eating at home and cutting down on entertainment — can help increase the money left over to invest.
Read More: Beginner’s Guide to Investing in 4 Steps
2. Lower your rates
Depending on your credit, you might be able to lower your interest rates by refinancing your student loans. The money you save on interest this way can then be put toward your investments.
If you’re wondering how much you can save by refinancing your student loans, use our calculator below.
Step 1. Enter your loan balance
Step 2. Enter current loan information
Step 3. Enter your new loan information to start calculating your savings
If you refinance your student loan at % interest rate, you can save will pay an additional $ monthly and pay off your loan by . The total cost of the new loan will be $.
Does refinancing make sense for you?
Compare offers from top refinancing lenders to determine your actual savings.
Checking rates won’t affect your credit score.
3. Max out your 401(k) employer match
A 401(k) is a retirement plan sponsored by an employer that offers tax-deferred investing that grows until retirement. In many cases, opening a 401(k) account is the best way to start investing.
This is because a 401(k):
- Reduces your tax burden
- Helps you prepare financially for retirement
- Is eligible for company matches from many employers
If your employer offers 401(k) matching, it’s a good idea to contribute enough to receive the full matching contribution so you can save as much as possible for retirement.
4. Open an IRA
Another investment option is opening an individual retirement account (IRA). Like a 401(k), an IRA helps you save money on taxes while making contributions toward your retirement.
There are several types of IRA accounts, the most common being:
- Traditional IRAs, which have you deduct contributions while paying taxes on your withdrawals
- Roth IRAs, which require you to pay taxes on contributions but allow for tax-free withdrawals
Because an IRA provides tax advantages to investors and helps encourage setting money aside for retirement, opening one could be a good option for student loan borrowers who want to get started with investing.
5. Do your research before investing
No matter what type of investment vehicle you choose — 401(k), IRA, or another kind of account — make sure to do your research before putting any money toward it. There’s an inherent risk in any investment, and it’s up to you to understand the risks and potential rewards of your investments.
Emily Guy Birken has contributed to the reporting of this article.
