Quick! Currently, do you know how much you owe on student loans? (No, this question isn’t to frighten or embarrass you). If you mentally responded, around $25,000-$35,000, you are not alone. As of 2019, the U.S. average student loan debt is approximately $32,731. There is nothing wrong with having student loans (unless you are not paying on time). We go to college/university to further our education and invest in ourselves.
Student loans range from subsidized/unsubsidized federal loans to bank loans and other varieties of private loans. While many of you may be dealing with high-interest rate loans, others may not be dealing with any interest rate until you graduate. So the question, “Should I pay off my student loans or invest?” does not have a universal answer because there are various factors to consider when making this strategic decision.
4 Factors to Determine if You Should Pay Off Student Loans or Invest
1. Type of Student Loan
The type of loan is, by far, the most essential factor. The reason being is because every loan disbursed has different student loan agreements & interest rates attached. For example, take federal loans (FAFSA), there are two types of loans you can qualify for:
- Unsubsidized Student Loans
- Subsidized Student Loans
Unsubsidized student loan interest begins as soon as the loan is disbursed. While the subsidized student loan interest is paid by the Education Department, and it won’t bill you for interest/payment until after six months of graduation (also referred to as the grace period).
You may also be using a direct bank loan as a student loan versus going the more common route of federal student loans. Bank loans often carry higher interest rates and require a cosigner if they have no credit history.
2. Student Loan’s Interest Rate
Once again, it boils down to the loan interest rate. Federal student loans interest rate fluctuates every year, for the academic year of 2020-21, the subsidized student loan interest rate (fixed) was 2.75%. While unsubsidized graduate student loans as of 2020-21 are 4.30%. Lastly, bank loans differ depending on the bank you received a loan from, but as of currently, the average is about 3.82% to 14.50% (fixed).
It is important to check your student loan portal as interest rates fluctuate throughout the years. It is advised, you start by paying off the higher interest rate loans if you have multiple loans. Essentially you could start investing when you have student loans with interest rates below 5.8%. While you can start investing, make sure you make the required payments on time and invest the remains (after accounting any other expense). Lastly, we wanted to note that there is student loan relief during the pandemic. Find out what loan relief you may be eligible for.
3. Your Financial Goals
Most likely, your financial goals go beyond paying your student loans. So it is important to consider your financial goals. Are you planning on moving out when you graduate? Are you planning to rent/buy an apartment or house (roommates to help with bills)? Do you plan to save up money for a car or a trip? Do you want to start investing or plan for retirement? Everyone’s financial goals are different, and it is important to consider before investing.
Find yourself stuck in your decision? Seek out advice from our team! Contact us for investing advice.
4. Social & Economic Factors
I can make an entirely new blogpost on how COVID-19 has affected everyone, including myself. Many individuals have gotten furloughed or terminated from their jobs. At the same time, others may be struggling to make ends meet. There are many economic factors and social factors that may be currently affecting you, from this pandemic to CA, WA, and OR wildfires to having to take care of someone who may be sick or involved in any way. I don’t mean to get philosophical, but life is truly unpredictable. Make sure you consider any factor affecting you right now or you foresee in the future.
Will You Pay Off Student Loans or Invest?
This blogpost is written as a suggestive method. Various social factors come into play. What we mean by that is that everyone has different approaches and lifestyles. If you would like to receive a detailed plan, seek advice from a financial advisor. We are happy to answer questions and be impact investing advisors for you.