Should You Invest When You Have Student Loan Debt?

 Mirah Gocher

July 17, 2018

The day you threw your cap in the air and rejoiced about graduating was likely accompanied by a short-lived feeling of euphoria and relief. When your cap came back down to the ground and reality set in, you might have experienced the sinking feeling of, what now? Combine that thought with a crushing average of $39,400 of student loan debt post-graduation, and you’re off to a stressful start to your future.

There’s no doubt that student debt is a staggering issue in the United States. According to Student Loan Hero, student debt is up 6% with a total of $1.4 trillion dollars of debt owed by 44 million borrowers across the country.

As post-secondary education is a hefty investment, debt has shied many people away from pursuing other investment opportunities. The possibility that investing could even be a strategy to reduce debt is unheard of by most. While investing with student loan debt is not the best decision for anyone, it might be the right choice for you depending on a few important factors.

Income is Important

The general rule of thumb when it comes to managing debt is that your payments shouldn’t exceed 36% of your monthly income. That leaves 64% of your pre-tax income for all other expenses, including necessities and emergencies.

Various factors, such your total debt and your other financial commitments, influence how much you will hypothetically be able to invest; ultimately, the answer lies in your income. While putting away 10% towards investing and having 54% of your income to live on might be sustainable for those with an $100,000 annual salary, that might not be the case for those bringing in $40,000.

As these important financial circumstances can vary depending on the individual, we recommend creating a comprehensive budgeting plan that considers all elements of your financial situation. Once you’ve analyzed your cash inflows and outflows, you’ll have a clear picture of how much you could hypothetically contribute towards investing.

Pay Your Minimums

If you’ve ever heard the age-old advice of paying yourself first, you’ll understand what we mean when we say pay your debt minimum first. The last thing you want is to file for a loan default, so be sure that the first thing you do each month is pay your minimum.

Once you’ve paid your monthly minimum and created a comprehensive budgeting plan, you’re in a good position to determine where your remaining money could best be put to work.

Let’s say your investment minimum is $100 and you’ve worked out a budget that makes investing an additional $100 per month an option. Now you need to decide if contributing that additional $100 towards higher debt payments or investing in your portfolio would be most beneficial. On one hand, you could double your debt payments and speed up the payback process; on the other, you could invest that money and potentially earn returns that could fast track your finances. Though there are several important factors to consider here, there’s one important indicator in particular: compound interest.

Compound Interest is Everything

When you have student loan debt, you’re paying interest. When you make investments, you’re getting interest. To determine if you should be putting more money towards debt first, or funnelling it into equity investments, you have to look at interest.

Generally speaking, the easiest strategy is to look at your losses compared to your gains. If the interest you gain from investments is lower than your interest payments on debt, then it’s probably best to focus on paying back your debts before you start investing. On the flip side, if your interest gains from investments are greater than your interest payments, investing can be a great strategy for debt repayment. You can use a handy calculator that compares student loan vs. investment interest to determine what situation you’re in.

The Bottom Line

At the end of the day, the goal is to determine the smartest way to make your money work best for you. Whether or not you should invest with student loan debt is entirely based on your own financial situation, and should be decided on accordingly.

That said, there’s a good chance you have friends dealing with similar student loan debt. If you all decide that investing could be a smart financial decision, starting an investment club is a great way to reach your goals. Pool your money, resources, and time together in an investment club to save on trading fees and make collaborative decisions. When you’re working together towards a common goal, there’s no limit to what you can accomplish.

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