Invest or Pay Down Your Student Loans?

If you're reading this article, you've undoubtedly heard that you need to invest as soon as you can. You might have heard about how you could save $2,400 a year from age 16 to 65, and have a million dollars saved up with a 7.5% interest rate. Time is so powerful when investing that starting early is absolutely critical to amassing a large amount of wealth. So what should you do if you have a large amount of student loan debt? Should you pay down that debt, and then invest, or should you invest first, and worry about the debt later?

There is no, one-size-fits-all solution here, so I'll explain my strategy and compare it to that of one of my friends who has a similar income and graduated with a similar student loan balance. The importance of acquiring wealth producing assets, like stocks and real estate were so engrained in me by the time I graduated, that I decided I wanted to pour as much money into those two classes as early as I could to increase my odds of becoming financially free, while decreasing my student loan payments. In addition, I realized that even if I aggressively paid off my loans in 9 to 10 years, my effective income increase would only be about $40,000, or the amount that I would no longer have to pay in student loans each month. A $40,000 pay increase is nothing to scoff at, but the problem is that it's static, and I would still be tied to a job in order to benefit. Instead, if I can create $40,000 in passive income each year by the same time, then I could effectively be in the same place, while still benefiting from those assets long after my student loans are paid off.

In my situation, I pay about $970 per month in student loans, and save $3,100 each month to invest. My friend pays roughly $4,000 per month for his student loans, and is saving nothing until his student loans are paid off. His current loan payoff date is 2023. My Current loan payoff date is 2039 (through PAYE forgiveness). 10 years after starting repayment, I will have saved and invested roughly $514,000, while my friend will have saved about $154,000, assuming he saves $4,000 per month for 3 years. Even subtracting my student loan balance of $300,000, I would still be ahead at a net worth of $214,000 compared to $154,000. How do things change at 20 years, when my student loan balance is forgiven? After 20 years, both of our student loan balances will be $0, but my invested assets will be worth $1,350,000 (accounting for $175,000 tax burden from forgiveness), and my friend's invested assets will be worth $967,000. Assuming everything is the same for my friend and I, it seems to make sense to invest early and pay off my loans through PAYE, while investing as heavily as I can to ensure that I'm maximizing my benefit from compound interest. I'm not saying this is the best route for you to take, I'm just explaining my rationale for choosing to invest early.