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People ask me whether I think they should focus on paying their student loans off first or also focus on saving to invest while they’re paying their debt off. For me, there’s no right or wrong answer.
I think it’s really a case by case scenario. Everybody’s different and everyone handles situations differently. I can’t tell someone to focus on investing if they have a high-interest rate on their loans, that doesn’t seem like a responsible thing to do. On the other hand, if they know how to trade and make a profit quickly, by all means, go ahead and do that.
I have no idea how to do that and I’m not in the business of trading so you’ll see none of that here. People make this seem way more complicated than it really is. It’s not rocket science, it’s actually pretty simple.
For me, it comes down to 3 criteria:
- How knowledgeable you are about investing
- Your tolerance for short-term risk
- Your loan repayment plan
- 18 Ways to Pay Off Debt Faster
- How Changing the Student Loan Payment Plan and Refinancing with SoFi Saved My Girlfriend Over 5 Years and Thousands of Dollars
- How to Know if Loan Consolidation is Right for You
How knowledgeable are you in investing?
It really depends on how solid your foundational knowledge of how the market works, your understanding of stocks, how to value them, etc. is. Without having a well-rounded understanding of stocks and the market along with human psychology, it will be hard for you to navigate through all the data and be able to be successful in such a short period of time, let alone successful at all.
Even if your loan repayment plan is 10 years or more, that’s not really a long time at all in terms of investing time horizons. It might be more beneficial for you to put investing aside, maximize your repayment plan, pay off your loans and learn more about investing before you make any moves.
Because think about it. We’re in the second-longest bull market in history. What if the market continues to do well for another 10 years, but the one stock you invested in drops 80% in value from it’s high? You most likely didn’t invest at the low, so you’re gonna lose practically all of your investment. Or even worse with bad timing, you invest at the top of the bull market and a bear market ensues for the next 3 years and every investment you made loses money.
When you’re in the moment it feels so real the market will never stop going up. But history repeats itself time and again. If you don’t know what to look for in a company and how to properly do the research, it’s better, in my opinion, to be patient, learn as much as you can and pay off your student loans in the meantime.
What’s your tolerance for short-term risk?
Some of you may not even have a 10-year repayment plan, it might even be shorter. Even if you have just $25,000 in student loans as opposed to say $150,00 for lots of graduate students, if you decide to invest, you’re making a bet that in the short-term you’re going to do better than the interest rate on your loans on top of the monthly payments.
The shorter your time horizon is, the more exposed you are to volatility. While volatility does not imply an investment is risky over the long run, in a span of only 3-5 years, it might give you a heart attack to watch your investments wildly spike up and down. What if you invested in Tesla? And what if you invested in Tesla at the high?
I don’t know about you, but I wouldn’t be able to sleep at night knowing I had student loans to pay off. It just wouldn’t feel responsible to me. Last year for the calendar year of 2017 after I finally figured out what I was doing with this stuff midway through 2016, my portfolio performance was 26.41% vs the S&P 500’s 21.83%. The last 3 months I’ve outperformed it at 8.70% vs 4.00% and year to date 3.81% vs .55%
Did I know that was going to be the case? No, of course not, nobody knows what’s going to happen in 3 months time. Even though I feel confident in my abilities after reading so many books and articles and interviews, I still would never delay paying off student loans and opt for investing because, for me, it’s too small of a window to expect great results. I only try to do what I’ve read and what I’ve read pertains mostly to Warren Buffett’s philosophy
So, yea, I’d pay the loans upfront as soon as possible and in the meantime, keep learning as much as I can. For me, I don’t like taking on risk if I don’t need to it just gives me chest pain and I’m not a fan of that.
What’s your loan repayment plan?
This question really shouldn’t be on here, because in my opinion, you should pay the debt off as soon as possible. It’s not just a monetary issue, but psychologically it can be such a relief knowing you don’t have to make any more payments. But if you’re 100% confident in yourself and somehow think you can be really successful even in a short period of time investing, evaluate your repayment plan.
Sometimes the rates on the loans are so low you might be able to get lucky and get a better interest rate on your investment. I say lucky because you never know when the market is going to turn, or if investors overreact to some news for the company’s stock you’re invested in and it drops like 10% or something. If you can’t handle the possibility, then don’t do it. Remember a correction occurs on average once a year, which is at least a 10% drop. If you know you’d panic, just focus on paying your loans off as quickly as you can.
If you want to consider refinancing your student loans for a lower rate, I highly recommend SoFi. My girlfriend got a great interest rate on the refinanced loans, it saved her thousands.
But again, only consider investing if you 100% know what it takes to do the proper research, have a high-risk tolerance and understand in the short-term, you’re just as likely to lose the money as you are to gain it.
As Ben Graham said, in the short-term, the stock market is a voting machine and in the long run it’s a weighing machine. So just be careful. I advise you not to do this, but I may be more risk averse than you.
And also, if you’re thinking about getting tax deductions on your interest rate from your student loans, to put off paying for them, that’s stupid.
The most you can claim is only $2,500 apparently. That’s nothing. Just be responsible and pay back your loans. The only thing I will say about investing simultaneously is to contribute to your 401k or Roth 401k if your company has a matching plan. This is because that is free money being given to you by your employer, and you should never pass that up, even if you do have a lot of debt. My girlfriend has a matching plan with her employer and she’s doing just fine repaying her student loans while contributing to the 401k matching plan.
Really it comes down to the type of person you are and how solid your fundamentals in investing are. Do you understand how the market works in the short and long-term? Do you realize you’re just as likely to lose money as you are to gain money in the short-term?
Are you psychologically ready to take on that risk?
For me, it’s not worth the hassle. I’d rather sleep well at night and learn as much as I can about investing. Here’s a great place to start: I found out yesterday CNBC released the Warren Buffett Archives and because of it I also discovered the Berkshire Hathaway 2018 Annual Shareholders Meeting podcast. Pure. Gold.
I’ve been listening to the podcast nonstop, and once I finish the episodes I’m gonna move on to the archives. I love it, man.
Also, check out my recommendations.
So what do you think of this? Would you feel confident enough in your expertise in investing to put off paying student loans as fast as possible, or would you take the loans all on in full stride and put off investing?
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