Should You Pay off Student Loans Early or Invest and Save?
Have you recently had more leeway in your finances to be left with extra cash in your account at the end of each month? As a graduate and forward-thinking adult, you may be wondering whether you should put that cash toward paying off your student debt early or investing in the stock market, a retirement account or other financial goals.
Before choosing, it is essential to consider your unique situation, your main priority and how different options might benefit you. This guide weighs the pros and cons of these options to help you make an informed decision.
Option 1: Paying off Your Student Loan Early
You may want to pay off your student loans early because it relieves stress, frees up cash for new financial goals and reduces the interest you pay over time. Still, student loan repayment requires the consideration of various factors, such as:
- The type of student loan you possess
- Personal financial goals
- Your income
- Other debt
When paying student loan debt off early, it may help to have a secure emergency fund with three to six months' worth of living expenses in place or enough to make you feel at ease, depending on your situation. If you have this kind of financial stability, paying debt off early may be an option for you.
Pros of Paying the Student Loan off Early
There are many benefits of paying off your student loan early if you have the financial capacity to do so:
- Pay less in interest: Paying off the student loan early may allow you to avoid paying the interest you would've owed over the life of the loan, helping you save money.
- Improve debt-to-income (DTI) ratio: Making extra payments toward your loans may lower your DTI ratio and improve your credit score, allowing you to qualify for better insurance rates and lower interest on mortgage payments and other loans.
- Become debt-free sooner: When you pay off your debt sooner, you may gain the financial freedom to put your money toward other financial goals like buying a house, saving for your children's education and opening retirement accounts.
Cons of Paying the Student Loan off Early
Some cons of paying your student loan off early include:
- Lost perks: If you're working toward repayment assistance or a student loan forgiveness program, paying off the student loan early may not benefit you because these programs fall away. In this case, it may help to continue with the minimum payment until your loan is forgiven.
- Higher monthly payments: When paying off your student loan earlier than planned, you should be prepared to offer higher monthly payments. If this is challenging for you to handle, stick with the minimum payment and try spreading your extra income to other areas of your budget.
Who Should Pay off Their Student Loan Early?
Due to the various pros and cons of paying off student loans early, this option may only be suitable for certain types of people. Here's who this option might be beneficial for:
- Borrowers with a high interest rate
- Borrowers paying off a private student loan with a variable interest rate
- People whose top priority is to become debt-free and reduce emotional stress
- Those looking to lower their DTI ratio to qualify for mortgages and better rates on other loans
How to Pay Down Your Student Loan Debt Faster
There are several steps you might take to pay off your student loan debt faster:
- Make extra payments: If you can afford more than the minimum monthly payment, designate extra payments toward the principal instead of interest and prepaying fees.
- Make bi-weekly payments: Making two monthly payments may help you even out your monthly budget and make an extra monthly payment each year.
- Cut down on unnecessary costs: Reevaluate your spending habits and budget and eliminate unnecessary purchases. Use this money to make an extra payment toward paying down your student loan debt.
Option 2: Investing and Saving Your Money
Investing and saving can be an excellent choice if your current priority is to retire early or build your savings rather than be debt-free. In this case, you might pay the minimum toward your student loan repayment and put your extra income toward stock investments, savings for a house or retirement contributions like a 401(k) plan. Depending on your unique situation and goals, this may be an excellent choice to build up a successful retirement.
Pros of Investing and Saving
Here are some of the benefits of investing and saving:
- Flexible withdrawal rules: Depending on your investment account, you may be able to withdraw money when needed.
- Potential for a better rate of return: Investment and saving plans may allow you to receive a higher rate of return than a student loan interest rate costs. Still, this mostly depends on the plan you choose.
- Retire sooner: Investing sooner and putting more money toward a retirement plan instead of paying off a student loan earlier may allow you to avoid working longer in your older years to reach a retirement savings goal.
- Passive income: Investing in the stock market may help you earn a passive income over the years with little effort.
Cons of Investing and Saving
Consider these cons of investing and saving:
- Investment risks: While your investment might earn more over time, returns are not guaranteed, so you risk losing money in the stock market. This risk makes it essential to do thorough research and speak with a financial advisor.
- Your income and flexibility: Are you earning enough income to pay off your student loan and invest simultaneously? If you cannot juggle both, paying off your student loan before investing may be best.
Who Is Investing Best For?
You may be able to prioritize investing and saving over paying off your student loan if the following applies to you:
- You have a low interest rate on your student loan and expect your invested asset's long-term returns to be higher.
- You are enrolled in or expect to be eligible for student loan forgiveness or an income-driven repayment (IDR) plan.
- You can maximize tax deductions from student loan interest and retirement contributions.
Build Financial Confidence With First Commonwealth Bank
Before deciding, be sure you know your personal priorities, build up an emergency fund, and thoroughly understand your student loan or investment to weigh the pros and cons of your financial options.
Whether you're planning to invest, open an educational savings account, get a mortgage solution or open an individual retirement account (IRA), our team at First Commonwealth Bank has resources and solutions to assist you. Our team is dedicated to helping customers manage, save, borrow and protect their money through our valuable services. If you're ready to build financial confidence with First Commonwealth Bank, contact our friendly bankers today.
Investment and insurance products and services are offered through Osaic Institutions, Inc., Member FINRA/SIPC. First Commonwealth Advisors is a trade name of the First Commonwealth Bank. Osaic Institutions and First Commonwealth Bank are not affiliated. Products and services made available through Osaic Institutions are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.