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Not sure whether you should pay off your student loans or invest your money? Here’s how to make the right choice for your situation. (iStock)

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Student loan debt is a burden for many Americans. In 2020, 30% of all adults reported that they had student loans, according to Federal Reserve data. Student loans can create financial stress and make it difficult to save for retirement or other goals.

If you’re in this boat, you might be looking forward to paying off those student loans as quickly as possible. But in some cases, it may not be the right move.

If you’re wondering whether to pay off your student loans or start investing now, this guide will help you weigh the pros and cons of each.

Consider refinancing your student loans to save money. With Reliable, you can Compare Student Loan Refinance Rates from various lenders.

Pay off student loans or invest? What to consider

There’s a lot to think about when deciding whether to invest your extra cash or put it into your student loans.

Here are some things you’ll want to keep in mind when making your decision:

  • your emergency fund , Ideally, you should have three to six months’ worth of living expenses. emergency fund, just in case something unexpected happens. If you don’t already have savings, building this fund should be your top financial priority.
  • Rate of interest – How do your student loan interest rates compare to returns from the stock market or other investment vehicles? If your student loan rates are low, investing can make you more money over the long term. But if your rates are high, you may be better off prioritizing your student loans so you can save money on interest.
  • Types of student loans – If you have federal student loans, you have several repayment options at your disposal, including income-based repayment plans. These can help you reduce your monthly payments while investing your cash elsewhere. private student loans They don’t have such allowances, and they may have higher interest rates than federal loans—so it may make more sense to pay these off faster.
  • Financial Priorities – How important is it that you are debt-free, and how much risk can you take? Investing is always riskier than paying off debt and getting rid of the interest costs that come with it.
  • retirement fund – Consider how much time you have until retirement, how much money you currently have in your retirement accounts, and how much you want to save when you retire. If you are short on savings, you can choose to prioritize investing in your retirement account. Additionally, if your employer offers matching 401(k), you may want to take advantage of it rather than invest that money.

When it comes to choosing between investing and paying off student loan debt, there is no right or wrong answer. It depends on your unique situation and your goals.

Option 1: Pay off student loans first

Here are some scenarios in which you might want to prioritize paying off your student loan debt Before investing your money:

  • Your interest rates are particularly high. If your student loan rates are particularly high, paying them off early is usually the best way to access your money. In general, if the interest rate on your loans is higher than the interest rate you’d get on the stock market or any other investment, paying them off earlier is probably a better option than investing.
  • You have a variable interest rate. With a variable interest rate, both your rate and payment can increase regularly. In this situation, it may make more sense to pay off the loans quickly or to refinance into a fixed rate loan instead.
  • Your debt is causing stress (financial or otherwise). If your student loan debt is making it hard to get through or is just causing mental stress, paying it off is probably the best way forward.

If you think paying off your debt first is the right move, you have several ways to go about it. In some cases, refinancing may be the best route.

Should I Refinance My Student Loans?

Refinancing can give you a lower interest rate (and, potentially, lower monthly payments), which makes it easier to pay off your loans quickly.

Keep in mind that if you refinance a federal student loan to a private student loan, you will lose all the benefits of federal loans, including income-driven repayment plans, loan forgiveness and forbearance.

Also, consider your credit score, which plays a big role in your ability to refinance. Lenders typically require a score of at least 670 to qualify. And the lower your score, the higher your interest rate is likely to be. if you want Add a Cosigner with Good Credit To help you qualify for refinance with better rates and terms.

see reliable for Compare Student Loan Refinance Rates From multiple lenders in minutes.

Debt Repayment Strategies

Several loan payment methods can help you handle your student loans efficiently. The most common are the debt snowball method and the debt avalanche method.

With debt snowball method, You make minimum payments on all of your loans and then put any extra cash toward the smallest student loan balance, aiming to pay it off first. Once it’s paid off, you move on to the next-lowest balance, and so on.

debt avalanche method Prefers loans with highest interest rates. You focus on paying off the loan with the highest interest first, and then continue to deal with the remaining debt. Ultimately, this method saves you the most money in the long run, because you’re reducing the amount of total interest you pay.

Option 2: Invest first

In some cases, investing before paying off your student loan debt may be a better move.

You may consider investing in the following situations before paying off your student loans:

  • The rate of return is higher than your student loan interest rates. Charles Schwab Investment Advisory, Inc. According to the U.S., the projected return on the stock market is approximately 6.6% through 2030. If your student loan interest rates are lower than this, investing can earn more than your savings by paying off your student loans faster. But remember, there is no guarantee of returns in the stock market.
  • You are behind in saving for retirement. If you’re nearing retirement or falling behind on your savings goals, investing in your retirement with a 401(k) or other retirement plan can help you build those savings more efficiently. Compound interest is on your side, and the sooner you start, the better.
  • You are eligible for loan forgiveness or other assistance. If you know you’ll qualify for student loan forgiveness or some kind of loan assistance (even a few years down the line), paying off your loans too soon isn’t the best use of your funds. Maybe.

Keep in mind that with investing comes risk. While returns can be estimated at higher rates than your student loan rates, those returns are never guaranteed.

Option 3: Pay off student loans and invest at the same time

You don’t have to choose just one or the other. A hybrid approach can also work, allowing both of you to pay off your debt and invest together.

To do this, take any discretionary funds and divide them between your debt and your investments. (You can still use the debt snowball or avalanche methods when paying off your loans.)

The downside of this approach is that you will make progress toward both goals. You will also reduce risk, as you are not investing all your money.

The drawback is that you will extend your loan repayment deadline, which will lead to higher interest costs. You won’t even be able to see the full potential of your investments, as you will limit the amount of money you put into them.

With Reliable, you can Compare Student Loan Refinance Rates All in one place from different lenders.

How to Invest When You Have Student Loans

If you have extra cash after making your student loan payments, or you decide to take the hybrid approach, you need to follow a few steps to get started investing:

  1. Calculate how much you need to invest. Sit down and crunch the numbers. After paying the bills, how much can you comfortably put into your investments?
  2. Decide between self-managing and working with a professional. You can choose your own investments or take the help of a fund manager. With a fund manager, you entrust your investment portfolio to an expert, but you will typically pay a fee for this service.
  3. Research your options. You have several options for investing, including investing in your 401(k), buying an S&P 500 index fund, and using an investment app.
  4. Open your account Once you have chosen your investment path, you will need to set up your investment accounts. From here, you will choose your investments or they will be managed by a fund manager.

If you’re unsure whether to invest or pay off your student loans, consider talking to a financial advisor. They can offer personalized advice to guide you down the best path for your situation.