Just landed that marquee job post-graduation and have a boat load of cash lying around? Consider yourself lucky in a time where McDonalds wants you to have a college degree to work the register. If you are one of those lucky ones, you have a few very important questions to ask yourself which is “should I pay of my student loans or invest?” This topic is widely debated and some have argued for one or another. There are a plethora of different considerations that must be made before determining the answer to this question. Let’s get started.
A) How much do you own on your loan? Determining this factor will be the first step in figuring out how much cash you’ll have available to invest and how much you’ll owe Sallie Mae each month. Consider this first. The man who begins investing at age 25 with minimal cash will have more money at retirement than the one who begins investing at age 30 with significantly more cash. The power of compound interest is absolutely amazing and can put you on the fast track to wealth. However, if you owe $100k on your school loans (believe me, some do), you may want consider doubling up on payments to decrease interest and lower investment funds until the loan is paid to a manageable amount.
B) What’s your earning potential for the future? Do you foresee a major raise or job transition in the near future? If so, it may be wiser to pay a small, manageable amount on your loan and when the pay increase comes, apply the raise towards the balance of the loan. Some would consider this ludicrous but, think about it for a second. If you apply your extra earnings to the loan, once it’s paid off the extra funds can be applied to investments as well.
C) Are you married? This is my favorite method of all. Apply the second income in your marriage to the balance of your debt. Wow….somebody’s not going to like this idea! However, it’s one of the most effective strategies to beat interest and fast track eliminating the loan balances. Imagine this, you and your spouse both make $40k a piece, which makes for a fairly decent household income. Live on less for 3 years, pay off your school loans and save ½ down on a home payment while you’re at it. While it takes major commitment and sacrifice to complete this feat, it also provides you more flexibility for investing and such down the road. By the way, imagine investing $40k per year into real estate and other investment vehicles. Within 10 years, you should be almost retired! Personally, if you have the opportunity to live on 1 income and invest the rest, I would pay minimum payments on the school loans and stock up on long term investment.
Whatever strategy you decide to choose, be sure to consider the above factors first. Equipped with these tools, you’ll save yourself a lot of heartache and wasted money down the line.