When I graduated college back in 2013, I entered the working world with four student loans, totaling about $30,000. My minimum payment was $356 a month, and it was enough of my salary to keep me from moving out of my parent’s house. I quickly decided that I wanted to pay off my loans ASAP and get savvy about finances, so I started reading books and blogs about money management. I distinctly remember reading this one piece of advice over and over: It’s better to invest in the stock market than to pay off your student loans.
The logic was that, on average, the stock market grows by 7% each year, which is higher than the 5-6ish percent you pay on low interest loans, like student loans. So investing would make you more money in the long run compared to paying off loans early (if only by a few percent).
But I still wanted to pay off at least some of my loans in order to get my monthly minimum payment down, so I could afford to get an apartment with roommates. So I decided to do a little of both, I saved to pay off my student loans, and I saved a small amount in a mutual fund every month.
If you’re a regular reader here, then you know the next part. I picked up two part time jobs in addition to my full time job, and worked all three for over a year in order to pay off $15,000 in 15 months. After that, I was able to move out of my parent’s house and quit the two part time jobs I had been working. It felt like I could finally relax a little.
Over the next year I continued saving in my mutual fund and slowly paid off the rest of my third student loan.
By the beginning of 2016, I had managed to save just over $8,000 in my mutual fund, but it wasn’t doing well. In fact, it was down a thousand dollars. I had become a little more versed in the finance world since I first opened the account, and realized that even though it had no minimum balance and was a good choice for a first time investor like me, it didn’t have much promise for long term growth. I decided to withdraw the money and reinvest in an S&P 500 mutual fund. That is, until the $8,000 was withdrawn and sitting in my checking account.
At this point I had just one student loan left, with a balance of $6,500 and a minimum payment of $92. I thought that this was a small, manageable payment, so I had decided to just pay the minimum for a while and use the extra money to live a little. That seemed reasonable, right? But with the $8,000 withdrawn, I started to think about which option would be better. Did I want to invest or pay off student loans?
It’s only $92 a month, what’s the big deal? I knew this was a minuscule student loan payment compared to what the average recent graduate pays (about $350), but there were a few personal goals that convinced me to put my money towards the loan rather than the possibility of a few more interest points.
Invest or Pay Off Student Loans? Things to Consider
Money In vs Money Out
I was extremely lucky to have a year where I had three sources of income and almost no expenses (gas, car insurance, and food were pretty much my only regular necessities). As you can imagine, in a situation like that, money can be saved up quickly and easily. But I knew that it wasn’t always going to be that way. I had moved out since then, so rent and utilities had been added to my usual expenses. Quitting my two part time jobs also cut my monthly income quite a bit. I also had health insurance at 26 and an impending car purchase to plan for. I was driving a 1999 Mazda. This car needed a wire jiggled every time it rained in order to start, occasionally spit sticks and dirt out of the AC vents, and had a radio that sometimes scanned at will like it was possessed by a ghost. I knew that my car would likely need to be replaced before it technically became eligible for antique plates, which would mean another monthly payment (and probably an increase in my insurance).
Side note: I still drive this car. Pray for me.
Cost of Living
I also had to consider that I was living in a more affordable area. When you live in Providence with roommates, it’s relatively easy to find apartments that rent for about $500 a person. Sometimes less. But I had to consider the fact that I wouldn’t always want to live with roommates, and that meant a big jump in rent. Don’t ask me why you can’t rent a crappy attic studio with no kitchen for anything less than the price of a nice 2-3 bedroom in this city, because I don’t get it either.
I also knew that I wanted to eventually move to New York, which would mean a jump in cost of living. If I was going to make it there, I needed to take advantage of the opportunity to reduce my monthly expenses to the absolute minimum here.
The standard student loan payment schedule is 10 years. Ten! And that’s if you don’t need to take advantage of the income adjusted payment plan. A lot of big life decisions are made during that decade: moving, a house, a wedding, etc. While I didn’t have any immediate plans for a house or a wedding, I was (and am) very interested in starting my own business. Minimizing monthly expenses would come in handy during the inevitable “bootstrapping” period; when a new business is funded entirely by it’s owner/founder.
So, when deciding if I should use my savings to invest or pay off student loans, everything was pointing me to pay off the loan. So that’s what I did. I know it goes against traditional financial advice, but it just made sense for me. What about you? How have you decided to handle your student loans?
Please let me know if you have any questions! I know money is a taboo topic for a lot of people. But I’d much rather be open and honest and discuss real numbers than leave people guessing.
Student Loan Hero actually interviewed me and published an article about how I paid off my student loans. Which is pretty cool. You can check it out here.