Should you pay off your student loans or start investing? It's a common questions among new grads. Here are some calculations that might help you make your decision.

If you’ve graduated from college or graduate school in the last decade, I don’t need to tell you that college tuition is rising at an unsustainable level or that we are graduating with monstrous student loan debts—to the point that Americans’ total student loan debt has surpassed our credit card debt for the first time in history.

There’s lots of talk about the calculus of return on investment in education. I get plenty of emails from readers with six-figure student loans for degrees in social work who have a very difficult financial road ahead.

Sure, if you’re 18 and have the foresight to choose a reasonably priced college and an in-demand field of study, great. But if you’re older, wiser, and deeper in debt, how do you attack those student loans?

Specifically, if you find yourself with extra cash, should you pay down student loans early?

In most cases, I don’t think so. I recorded this video to very quickly answer why:

We’re going to get into the pros and cons of repaying student loans early versus hanging onto that money for things like an emergency fund, retirement, a home, or even just having fun. But first things first: When you’re starting down a big student loan balance, you want to be sure to do two things:

  1. Make a plan
  2. Make your payments

Make a plan

The best way to deal with your student loans is to make a plan, get organized, automate your payments and forget them. Loan consolidation can help if you’ve got lots of different lenders, but it’s not necessary if you’re organized.

I made a spreadsheet with all of my student loans, their balances, monthly payments, and interest rates. I then set up automated monthly payments through each student loan servicer’s website. (For those curious, I had student loan  interest rates of 5% and 7.6% and only made regular payments until my balances were about $1,000 each—at which point I paid them off in full.)

Usually I prefer to set up automatic payments through my bank’s online billpay because I can control them all in one place. I made an exception for my student loans for two reasons:

  • One of my servicers, NelNet, gave me a 0.25% interest rate reduction for having AutoPay through them.
  • With loans that have a variable interest rate, the payment amount changes every so often. Having AutoPay through the servicer’s website ensured I didn’t have to remember to update the payment amount every time the rate changed.

If you have several student loans, is a new app that can help you get to that level of organization. shows you charts of your loans by balance, payment, and APR, so you know where to focus your payments. You can also get targeted advice on applying for options like deferments, payment plans, forbearance, or consolidation. What they’ve done seems cool so far; I’m not sure it’s necessary if you only have a couple of loans, but if you have a half dozen or more this may definitely help keep them straight.

Make your payments

Not paying your student loans is a big deal.

You probably know by now that if you stop paying a credit card bill, your credit score goes down and it will be difficult to get new credit when you need it. The bank will send your account into collections and you’ll get lots of phone calls and letters until you pay up. You can even be taken to court and a judge can order your wages garnished.

If, however, you get into such serious financial straights that you need to declare bankruptcy, a judge may rule that you do not have to pay credit card debts and you get a fresh start.

With federally guaranteed student loans, you don’t have that option. Even bankruptcy does not relieve you from paying student loans. In addition to taking you to court and garnishing your wages, the government can withhold any tax refunds. If you default on student loans guaranteed by your state’s finance authority, there may be additional consequences such as suspension of your professional license (for example, to practice law or medicine) in that state.

The bottom line is that repaying student loans is an obligation. Trying to skip the bill is a bad idea!

Fortunately, if you’re having trouble paying, there are built-in protections like reduced payment plans, grace periods, and forbearance—an extreme program in which you may be able to suspend payments for a brief period of time. In some cases, you may also be eligible for partial or complete loan forgiveness if you work in public service.

Paying student loans early doesn’t always offer the best return

As we learn about personal finance, writers and experts drive home one point again and again: debt is bad. Avoid debt. Get out of debt as soon as possible. However, in an effort to make sure everybody “gets it,” we’ve oversimplified the equation. Not all debts are created equal.

I sometimes come across the term good debt and bad debt. “Bad” debt is bad because it either has a wicked interest rate or is designed to pay for depreciating assets like a car. “Good” debt is “good” because it’s used by appreciating or income-producing assets like a business, real estate, or an education.

I don’t like the terms good and bad because it’s hard to call any debt “good.” A debt may not be bad, but it’s never “good.” There’s bad debt, and there’s debt that’s OK to keep around because you’re using it as leverage to build more wealth than you could without it.

And that’s how I view student loans. If held to an answer, I tell most people not to repay student loans early. Instead, take that money and invest it. As long as your student loans have interest rates less than 10% over the long run, your money should do better in the stock market than the interest rate on your loans.

Look at it this way. If I gave you the choice between two investments:

  • Investment A pays 10% and is liquid (you can access your money anytime)
  • Investment B pays 5% and is illiquid (once you put money in, you can’t get it back for many years)

Which one would you pick?

Probably investment A. But by paying off your student loans early, you’re choosing investment B. As soon as you make a big loan payment, that cash is gone…you can’t use it for anything else: emergencies, a new home, an investment opportunity, etc. This is another reason I prefer hanging onto extra cash and investing instead of paying off a student loan early.

But…paying off student loans is a guaranteed return, isn’t it?

There is, however, one big advantage to Investment B: The return is guaranteed.

There’s no way around it: Investing in the stock market is risky. Historically, stock market returns over the long run are stable and may even be as high as an average of 8 to 10% per year. But we all know that today’s economy is uncertain. You could do better, or you could do worse.

When you repay your student loans, you get a guaranteed return. For every additional dollar you pay towards your student loan now, you save paying interest on that dollar for the remaining term of your loan. It’s as good as putting that money in your pocket. This is why, if you have private student loans with high interest rates, it makes sense to repay them early. Although you might squeeze average annual returns of 12% or more out of the stock market, you can’t count on it.

This is where the decision gets tricky: It all depends on the average annual return you expect to earn from your investments and how that compares to your student loan interest rate.

Here are three examples:



In this scenario, you have student loans at 5% and have a conservative expected annual investment return of 7%. Over 20 years, the difference between repaying your loans early and using that money to invest adds up to $18,000. So even a small difference in expected return and loan APR can add up to big money over time.


In Scenario 2, the high 10% loan APR is quite a bit higher than the 7% expected return, and investing instead of repaying the loan early means losing nearly $31,000 over 20 years. This is why it is smart to repay high-interest student loans early.


In our final example, the loan and expected annual investment return are the same. Although I personally believe you’ll do better than 5% investing in stocks over the long run, many people may disagree. In this case, whether you invest or repay the loan early, you come out even.

So what expected rate of return should you use to make your own calculation? I think 7%  is a totally reasonable target and may even be on the conservative side. I’ve heard Dave Ramsey use 11 or even 12% as his expected investment returns. It’s possible, but I wouldn’t bet on it. If you’re a more aggressive investor, use 10%. If you’re more conservative, stick with 6 or even 5%.

Special circumstances

There are a few situations that change the rules.

Income-based repayment plans

Some lenders allow you to reduce your monthly payment if you don’t earn a lot. Typically this program is designed to help you get started in an entry-level job or if you’re working part-time while looking for full-time work. You’ll want to start making the full student loan payments as soon as you can afford it.

With reduced payments, you may not be paying much principal each month—or you may not be paying principal at all—just interest. At that rate, you’ll never repay the student loan—the payments will stretch on forever.

Buying a house

In some cases, big student loan debts may get in the way of qualifying for a mortgage.

Lenders require your overall debt-to-income ratio (the sum of your monthly debt payments, including your new mortgage, divided by your gross monthly income) to be less than a certain limit (on average, 40%). For example, if you earn $60,000 a year ($5,000 a month) and have a $300 student loan payment, a $300 car payment and are applying for a mortgage with a $1,000 payment, your ratio is 0.32 and OK.

Let’s say, however, you’re a recent law school grad with $1,400 in student loan payments, no other debt, earning $85,000 a year and applying for a mortgage with a $1,500 monthly payment. This puts your ratio at 0.41—too high to qualify for the mortgage.

Your options are to:

  • Reduce the mortgage payment (by putting more money down, extending the term, or finding a cheaper house).
  • Reduce your monthly student loan payments.

Unfortunately, paying extra towards your student loans does not reduce your monthly payment—it merely shortens the number of payments you’ll make. In this case you’ll need to talk to your student loan servicer about extending your term or refinancing.

There are lots of great options available if you want to go this route. Earnest is one of our favorite lenders right now – they provide some of the lowest refinancing rates available, and their application process is quick and easy.

Another route you have available is through a company like Credible, which scours the lending marketplace and presents you with the best terms available for your specific student loan needs.

Check your rate and payment with Credible—it’s fast, free, and won’t affect your credit score:

Obviously, these options are not ideal because they’ll cost you more money in interest in the long-run. But, if your goals include repaying your student loans in 10 years but also buying a home now, you can extend the term of your loan repayment, buy the house, and then resume making extra monthly payments towards your loans so they’re paid off according to the regular schedule.

Related: Should You Refinance Your Student Loans?

Finally, enjoy some money now

One final, if a controversial piece of advice: One good reason not to get overzealous repaying student loans early is to enjoy some money now. Most of us will have more money as we get older thanks to rising salaries and savings we build up over time. Of course, you won’t be young forever. One of life’s cruel jokes is that when you’re young and active you have no money and when you’re old you have money but less vitality.

Don’t go screw up your future finances to do it, but don’t bank so much on retirement that you neglect to travel, dine, and experience new things now.


As a recap, the upside to paying off student loans early are:

  • A guaranteed return on your money by avoiding future interest
  • Getting out of debt faster

The upsides of investing are:

  • Potential for a greater long-term return
  • Can cash out if absolutely necessary*

*Don’t underestimate this; having access to your wealth is important. When you repay debt, you increase your net worth but reduce your liquid wealth. Having $10,000 less student loan debt is not the same as having $10,000 in a mutual fund.

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About the author

Total Articles: 353
David Weliver is the founder of Money Under 30. He's a cited authority on personal finance and the unique money issues he faced during his first two decades as an adult. He lives in Maine with his wife and two children.

Article comments

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Adam says:

The one point that your analysis leaves out is the fact that you must pay off student loans every month or you are subject to penalties (the same is not true for investments). So if you lose your job or have unanticipated medical expenses that make it difficult to pay off the monthly payment on your loans for a year or two, you can quickly move from having 5% interest rates to something much steeper (and then that gets amortized and you have to pay interest on the interest). For me, getting out from under all the intangible negatives that come with having debt is much more valuable than the chance you will out perform the market though investments (there is always a chance that you under-perform or the market tanks). Getting out from under debt decreases your risks and will put you in a stronger position to invest (or just have fun!) over the long term. You can’t start a new business on the cheap or move to Thailand and earn a few bucks locally when you have $1000 in loans to pay off. Just my two cents.

J.T. says:

I have put a lot of thought into this, and I made the decision to pay off my student loans early. I decided to do this because I am saving 12.5% after-tax into my 401(k) before company match and pension, and I am saving 20% of after-tax salary into conservative investment accounts for the near future. I am taking money out of my fun account to make the extra payments on my student loans, and still have enough to live comfortably. If I was struggling to save money I would have decided not pay off my student loans early, but by saving 32.5% already I figured I am way ahead of the game.

Pamela says:

Did you have to file the amount of interest saved as income and pay taxes on it? I am asking because I paid a student loan off early and in a lump sum (it was an adjustable rate private loan with a ton of interest and I paid $100 a month for 10 years but the loan balance only lowered by $3K, so I took money out of my IRA to pay it in full). But the loan company instead filed some government form that I had over $9,000 forgiven and the IRS and state are after me over the taxes on the “extra income”

Ernie says:

I am 27, have two young kids, and my wife stays at home to be mom. I presently make only about 45K a year, and paying mortgage on a condo that has about 90K in equity presently. I have NO other loans I pay everything with cash!

I have 15K in student loans right now, and I was just accepted into Physician Assistant school starting this Summer. PA school will cost me about 90K. You are not permitted to work while attending school so ill need about 60-80K to live off too. That will put me at about 160K in debt when I graduate, besides what i still owe on condo.

Physician Assistants do pretty well where I live and on 40 hours a week can make 90-100K even as a new grad I believe.

Does this sound like a good investment “PA school”, and what do you think is the bast way to pay off the loan as fast as possible?

I appreciate it!

Ernie says:

HAHA no other loans besides the 15K in student debt : )

James Sibley says:

Mathematically it does make more sense to invest rather than pay off the loans quickly (assuming a reasonable interest rate). However, if we did the same math from the beginning before we took out the student loans, then we might have just worked harder to cash flow the education rather than push payments out into the future.

We cannot change the past so we are here today with student loans. The conundrum is this: with extra cash, do we pay off the student loans or invest? The article gives a clear mathematical explanation as to what we should do. However, it does not give a human explanation. The human explanation is this: (1) debt makes us slaves and (2) intensity of human emotion beats mathematical predications every time.

Regarding (1): debt is a siphon on your income and is like a fly in the house that will not go away. It is annoying and it will not leave until you do something about it. You can hide in another room but it will somehow find its way there, too. The only way to get rid the annoyance is to get up and do something about it. Once you do something about it, you can shift your focus towards something else. With debt, would it not be nice to make that monthly payment go away so that you can put that money to better use? Would it not be nice to not owe anyone anything ever? Would it not be nice to feel free?

Regarding (2): It seems that every time I “run the numbers” on projections I am aiming for (weight loss, yearly income, number of pages written per day) that I seem to always hit my mark far ahead of “the schedule”. Why is this? Because I write my goals down and imagine what it would be like when I hit that goal on or before the projection. Once I have that image in my head it is easy to feel like it is already in the present and that it is a reality. Then, by the “cognitive dissonance’ principle it is nearly impossible to fail. That mental principle will make you feel compelled to make it happen. If you write down the goal and feel like it is a reality, you will beat the mathematics every time. The mathematics we use does not take into account human will, motivation, and intensity. If you are fired up about paying off your debt in a year, you will probably do it in 8 months even if the current “mathematical reality” does not add up. The mathematics will never take into account the consequences of your being “fired up” such as you working harder and getting a hefty bonus or huge page increase as a reward. Even if your current job will not offer those, you will feel compelled to stay aligned with your vision and find alternative means of making your goal a reality. You cannot fail.

This site has an example of someone missing out on $18,000 over the course of 20 years due to paying extra on student loans rather than investing extra money. However, consider this: what if we worked our asses off and showed motivation and determination in paying those loans off while smiling and showing appreciation at work? What would happen? This is my prediction: the loan is paid off 3 years or less and our yearly income goes up more than that $18,000 difference quoted because we worked hard, smiled, and showed appreciation while at work. Now, on this site they showed us investing for 20 years rather than paying extra on the student loans. Well, in my example we used 3 years to pay off the loan so if we invest the extra income for 17 years at 8% we will have $674,000 (assuming no more pay increases). That beats their 20-year projection of only $209,000.

You might ask, “well, why not just work hard, smile, and show appreciation at work while making minimum payments on the loans? Then I’d have even more money.” Mathematically, that is true. However, almost no one does this. Almost no one does this because they focus on mathematics rather than having a goal and being fired up about it. Have a goal, be fired up about it, and the mathematical equation will always fall short of the future reality. Anyway, the money is not even the important part. Money is just an exchange of value. Nothing more. It is green paper and plastic cards with ones and zeros hidden inside of it. It is what we do with money that is important. In addition, when you are in debt it is important to consider the freedom that would come with having no payments as well as having a long-term goal to hit so that you make the most of your life. When you die, are you going to say on your deathbed “I am glad that I took out those student loans, made minimum payments, coasted through life uninspired to make change”?

Dawn says:

worked harder to pay for school instead of taking out loans?! is this the 70s?! That is not even possible!

Stephen says:

My wife and I (mid-20s) paid off over $100,000 in debt two years into marriage (90% student loans, 10% car) while giving and contributing to her 401k at the match. We strongly believe the borrower is slave to the lender and that being debt free is far more valuable than getting into a home quicker. You also mitigate risk as you pay off debt faster and don’t get into a house highly leveraged with the possibility of losing a job(s) etc.

Ric says:

Great article, I love the graphical examples. We have 12K in student loans that have been consolidated and have been setup with autowithdraw giving us a rate of 2.25%. The low rate plus low monthly payments put us in a unique opportunity. I agree with both Becky and Stephen above. Every situation has its own solution. The higher the interest rate the more urgent attention should be put towards the debt.

Since are payments are low, we’ve decided to pay a little extra each month to shorten the overall length of the loan. When you have 3 children, it is nice to have some more expendable cash each month as opposed to paying off the debt as soon as possible.

Oh, and never buy a new car. Not having car payments was the best financial decision we’ve made since buying our house.

Becky says:

I disagree. I say if you have the money to pay off the debt get rid of it. Most of the kids loans now are at around 7.8% and I would love to see anyone making that return on an investment. Maybe when the economy improves it would make sense but right no I would get rid of the debt.

Eve says:

I have about $15k in debt to my name (but my parents are paying it off b/c i recieved a $60k scholarship as an undergrad, so I don’t really think about it)…. anyway, the student debt I am more concerned about is my fiance’s. He has about $27k in debt now that he is finishing up his Master’s in public policy. I am also planning to attend grad school within the next year and am looking at anywhere from $20-40k in tuition.

We recently bought a car (5 year financing, $16k) and between the two of us will be able to easily afford the monthly payments for his student loans when the time comes, but we didn’t want to let $27k sit there and accumulate interest at 7% (compounded daily), so we recently paid off $10k in loans, and we still have some savings left. I hope that wasn’t a mistake, but I am not so sure that the returns on investing at this point would be above 7%. We also only paid the $10k after maxing out his Roth IRA and anticipate getting substantial tax refund checks back in the next few months (not to mention money from the wedding). I know a lot of people are saying that it is better to save up or invest instead of paying off student loans ASAP, but it just seems like having that much debt hanging over our heads at such a high interest rate isn’t doing anything for us (besides the bump in credit after paying the loans off regularly, but we have good credit scores from the car loan, credit cards, etc.)…

Stephen says:

Great article. Assuming you do have a high-interest loan that you want to pay down early, is it better to make smaller additional payments or save up and make one large lump sum (as in, an extra $100 per month or $1200 all at once).

My loan servicing company does not allow automatic debit for more than the amount due, so it is rather annoying to manually make an extra payment each month. I’m also not sure which makes more sense from an interest point of view. Thanks!

Greg says:

Depending on how your loans are set up, it actually may make sense to pay down smaller loans and the amount of ‘payments’ you have each months impacts your FICO score. So if you have one $100/month payment @ 4% on $10K, its much better than four $25/month payments on the same amount, as FICO takes into account the amount of payments but also the number of payments… since those in theory could all go to different accounts/institutions. I have three smaller loans with Sallie Puke (1200, 2600, 3700) and one large one elsewhere, I am targeting the $1,200 one to be paid down by next spring since this combined with paying off my zero percent CC (which expires in April 2013) means I can remove two payments from my history around the same time prior to a mortgage application. I project at least a ten point boost.

TheGooch says:

Debt is like a dead albatross hanging around your neck. I recommend getting your financial shield( emergency fund ) up and then attack your debt. It saves you money, relieves stress, helps your debt-to-income ratio, and is overall a good thing. Income is not an entitlement, so being prepared for the event of losing your job or an unexpected expense is just good financial strategy.

I do believe in investing for retirement while attacking for debt, even a small amount, in order to make it a habit. If you don’t make it a habit, you might not do it and spend your money elsewhere. With the habit of saving established, it’s likely you’ll continue to save after your debts are paid, and increase the amount once money is freed up.

Amber says:

Hello, I enjoyed reading this blog, thank you. BUT I do disagree with you. Personally, I have declared war on my student loan ($85,000). My plan is to pay it off ASAP. Not only will that really build my credit, which is good, it will give me peace of mind.

Copy Editor says:


Current hyperlink:
“with six-figure student loans for degrees in social work who”

Edit hyperlink to:
“six-figure student loans for degrees in social work”

Great read, by the way.

Alexandra says:

I am 20 years old just started a 8 month program, only 6 thousand dollars in debt. half substadized, half unsubstadized student loans. Honestly i just want to pay them off as soon as possable. All i wonder is will that help my credit if i repay them early(while in school)- I have no astablished credit and its hard to apply for other things or it will only help my credit if i acually have a payment due.

Great analysis.

I slightly disagree. I think the importance of setting up a system to invest, save and pay down debt is extremely important. But once you have a base amount of savings in place it is important to pay down your debt because of the amount of freedom it can provide you. Having debt holding you back and influencing the decisions you make in life is not ideal.



Jack Daniels says:

My girlfriend and I are late 20s and we manage student debt this way : Living with parents. The baby boomers put us here and are keeping us here by not retiring so rather than renting and making even more baby boomer landlords richer, we are staying out of the market until we can buy a place. We don’t care about the stereotypes bc you all are only kidding yourselves. Not everyone is born into money and not everyone wants to throw money away on rent (talk about depreciating asset)

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Jani says:

I have a $38,000 SLD and paying it off monthly through direct debit from my checking account. I had no idea about how GOOD and BAD debt worked after you explained that fairly well. My highest APR is around 6.8%-7% and my lowest is 2.5%. Annually I do recieve a decent amount throught my student loan debt as an investment option I am not going to complain. Unfortuantely, I would like to continue school and complete my masters in economics, however I only have my bachelors and feel that is not recogonized enough as competition and demands are high. I am debating weither its a good idea to go back to school RIGHT AWAY and finish off my masters or wait to get some of my SLD payed off before I continue? The rising cost of tutition is mind boggleing as there is always hikes, increases, and fees, also again whose knows about the mallurky gloomy economy will be….nither optimistic or pessimistic on this situation but just generally aware of my hirizons and weither I shall move foward or not. I’m glad to have read this article.

Tara says:

If I could get some advice. I just graduated with a Masters in Social Work. I did get a job pretty quickly but not a high paying one (there is no social work job that is high paying- initially anyway). I have 18,000 dollars in loans at a 6.8% interest rate (stafford loans). I do not even know where to start in paying it off. Should do it as an Income Based loan and pay it off over 15ish years? Or pay monthly rate over a number of years but I do not know how my income will change. All this is mumbo jumbo to me and need some help!

Kelly Coba says:

Hello Everyone,

Thanks for awesome tips and advice… What is considered low student loan interest 5%, 7%, 8.25%? I have several loans with different amounts totaling to about $60,000. Now I am currently making about $48,000 net i have two smaller private loans with about 5% interest for 5,000 and 4,000. and one consolidated loan for 50,000. I would like any feedback on paying off debt… My loan total comes out to 450 per month and I pay about 150 for private and 300 for public… I am wondering if this is the best method or should I try to knock out paying the private loans first? Any feedback is appreciated…

Dennis says:

Hey everyone,

By the end of my graduate program, I will be about $100,000 in debt due to student loans. Thanks to my parents, I currently have a Davis/Mutual fund worth around $20,000 that I can spend on whatever. I am contemplating between two scenarios. Option A: I use this $20,000 to knock out some of my student loans. Instead of graduating with $100,000 in debt, I would use my $20,000 Mutual fund for the upcoming school year and therefore graduate with $80,000 in debt. Option B: I graduate with the $100,000 in debt and just keep my $20,000 for living expenses, further mutual fund gains, emergencies, future home etc. I have Stafford and Grad Plus loans with interest rates of 6.8% and 7.9%, repspectively. I shouldnt have a problem finding a job after graduation and starting salary for my field is around $70,000. Does anyone have any suggestions or advice? I’m trying to be proactive with this, but am definitely worried about all this accrued debt. Anything would be awesome!


Chandler CPA says:


Congratulations on being about to finish your graduate program. I’m sure it will be nice to finally be done with school. Regarding your situation, I would probably recommend not paying off the student loans immediately. The reason, you would be left without an emergency fund. While the economy is recovering it has not fully recovered yet and you may find yourself looking for a job and needing that money. As I mentioned in a previous post student loans tend to be very flexible and allow you to defer them if you are in a financial crunch. This would be the same if you owe 100 or 80k. Now once you are solidly in your field and feel a bit more comfortable paying those off early would be beneficial. One negative to your student loan debt and the fact that you are likely going to have an income in the 70k range to start is that most of your student loan interest will not be deductible. The phase outs for a single individual start at 60k so the tax break will be pretty small. Also as your income increases the tax break will simply go away.

Hope that helps-

Read IRS publication 970 for more information on student loan debt

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein

Dennis says:


Thank you so much, I really appreciate your suggestions and will most likely hang on to the mutual fund for future endeavors. I know it is common for students to graduate with debt these days and most are worried or lost as to how to attack these loans. We all appreciate qualified professionals like you who take time out of their day to assist us.

Kristin says:


I recently finished graduate school as a physician assistant and started a new job. My loans total around $170,000 after attending 3 years of a private institution in Boston. My salary is good (around $90,000) but I am still having trouble making student loan payments and affording to live in the city, which is most convenient for my job. I live a very simple lifestyle and do not have any other debt. I consolidated my loans with a rate of 7.5% and have applied for the income based repayment plan which puts my payments around $900/mo, down from $1300/mo on the standard plan. I am currently single and would like to save for a house and new car in the near future.

Any suggestions as to whether or not I should continue to pay the minimum, or put extra money towards paying off the loans quicker?

Amber says:


If I were in your shoes, I would focus on that loan and pay it off quicker. It is important that you have an emergency fund (6 months) but after you have that, declare war on your loans and kick its butt.


Wade says:


My wife(23) and I(25) are currently dual income, grossing $109,000. We have been out of college for about 18 months now, and are currently hacking away at our combined student loans/one car of $68,500(Originally $94,000). We are paying $3,000 per month to all loans, $1,400 of which is the minimum payment.

We really want to start a family, but I am not willing to do so until we pay down all of our loans and can survive off my military income(in case we decide she is going to stay at home).

We are currently maximizing her 401k matching program($172 monthly/$2,112 yearly), which makes her retirement saving double that at $4224/year.

I am currently contributing 10% to my TSP(a military 401k) which makes my retirement savings $424 monthly/$5,088 yearly.

What I am thinking of doing is keeping her matching the same(it would be stupid to throw away free money) and lowering my contributions to 5%, instead of 10%, giving us $200 more per month for loans. Also, we would try to trim some savings else-ware($250). But the big problem is, how much will this hurt our retirement plan for the future?

As I said, we really want to get these loans out of the way, so we can focus on a family…Our current plan gets us debt free in 20 months, but we want sooner….Any suggestions?

Matthew Johnson says:

You are not looking at the entire picture…

Student Loans = debt… Using the cash to start a business instead of paying off the student loan early creates more debt… Most new businesses fail according to statistics.

Once the student loan is paid-off, you can begin making extra payments on your mortgage and pay it off way early, too. Paying your mortgage off early could potentially save hundreds of thousands of dollars over the life of the loan.

What about an even bigger picture… Allowing yourself to “think” that some debt is OK debt will encourage you to get more debt. More debt means less for investing.

You mentioned that if the student loans were less than 10 percent in interest that an investment with an 8-10 percent return on investment is a better choice? I don’t believe that to be true. (Well, especially if your student loan is at 9 percent interest, and if your return on investment was at 8 percent, then for sure no)… But, what about inflation? Cost of living goes up approx. 4 percent per year, on average, so even if you got a healthy 10 percent return on your investment, if your student loan was only 8 percent, you’d be losing that additional 2 percent. Multiply that 2 percent by the length of your student loan (and the monthly amount you’re paying on it that you can’t invest in other investments) and you’ll be astonished at how much money you could have had in an investment account, AND be debt free from the student loan.

I believe that paying all your debts off as fast as you can is the best strategy to achieving financial freedom.

Amber says:

I agree with you 100%. NO DEBT= MORE FREEDOM

hwally says:

I’d like to see an analysis on an option D: Live like college students for a few more years (3-4) and completely pay off those high student loans in a short time frame. While this option wouldn’t work for most, for those few dedicated people I think it might be more worth it in the long run. Wouldn’t the dramatic decrease in the amount of interest you are paying make it work it? then you could take the whole payment and invest it, and feel better about it because you don’t have any debt.

Would love to see what wealth that would net you in this scenario.

Samantha says:

I have roughly $46,000 in student loan debt for undergraduate and graduate school. I would have loved to live like a college student a few more years and put extra money to that debt. However, I was 27 when I graduated from grad school and 28 when I got my first “real” job with a decent salary, I needed to move out of my parent’s house! If I were 22 or 23, I definitely would’ve stayed at home longer! I’m currently on an IBR (income based repayment) plan and I work a second job to pay down some smaller debt. As soon as I can, I will be making full payments to get that number down!

Andrea W says:

I think one very important thing you’re forgetting about is that there are people in this equation, and that emotions and mental feeling are behind all this. Mentally, it feels way better to see your student loan debt go down than it does to see your money go up and down in the whirls of the stock market. For some people, not all. So for those people, it’s better to invest in student loan repayment because it’s a much more stable mind, which deals a lot with happiness.

🙂 Thanks for the post!

Jonathan says:

Graduated college with $37,000 in student loan debt between my wife and I in 2009.

She was making $35,000 and I was making $26,000. Decided to have her stay home with our first child and she still stays home with babies #1 & #2.

Just celebrated our 3rd Anniversary and have $6700 left in student loan debt and no other debt.

I only make around $35,000 per year before deductions. We have a 2002 paid off Honda Odyssey (new to us last month) and rent in a decent area of our city in a two bedroom townhome.

Just get literate,pick a system (we do Dave Ramsey 7 Steps thus far) and live simply and everything else will fall into place.


Thanks for this wonderful post. The only element missing from your analysis above regarding paying down the student debt vs. investing the money in a stock market is that you need to factor your tax bracket into the equation. If you are a working single you may be in 15-25% tax bracket between federal and state taxes. In this case even investing at 10% may be just as rewarding as paying down a student loan with 7%.

Ben says:

Thanks for this great post. I graduated from college in 2010 with $10,000 in private loans (at almost 10%) and about $15,000 in government loans (between 5 and 6.5%). I’ve paid down $7,500 of the $10,000 and will soon be finished with this high interest portion. My question is what to do once that happens, seeing as how I have a new job (that I HOPE is steady) and plans to go to grad school within 5 years. Should I focus on paying down the lower interest loans, which at my current rate I can do in just over a year from now, or on investing somewhere where I can pull that money quickly for grad school tuition?

And as an added complication, of course, how will doing either of these things affect my financial aid prospects in grad school?

Finally, does it make sense to contribute at all my work’s retirement plan now, or wait will I’m out of grad school to do that? My point being that the more money I have on hand for grad school, the fewer loans I’ll have to take out.


David Weliver says:

Glad this was helpful, Ben.

Knowing that you are going to grad school, I would probably try to enter grad school 1) with a source of cash for emergencies and 2) needing to borrow as little more as possible. In addition, it’s my understanding that when figuring financial aid, money you have in 401(k)s or IRAs for retirement is not seen as funds that are available to pay tuition, so I wouldn’t delay starting to save for retirement…the sooner the better, even (maybe especially?) in this case.

Chamanda says:

Love the blog!

I am a recent graduate and I am one of those people in the no difference category. When I did the math, I could either (a) slowly pay $300 / mo for 10 years at 6.8% or (b) live with a tighter budget now, and pay off the debt in about 14 months. I chose option (b) and will be coming out, debt free, Dec 2013. Over the 10 years, I am saving myself $8,000 in interest alone.

Granted, I started building my emergency fund ASAP – about 4 months of expenses just in case, so I feel financially comfortable enough to have around half my monthly going towards these loans.

One reason I have a really tough time agreeing with your invest some pay some down idea – if you give a mouse a cookie, its going to want a glass of milk. If the mouse never knows the cookies exists, its happy just having its cheese. I look at the extra money I put towards my student loan each month as keeping away that glass of milk, because as of Dec 2013 I can do whatever I’d like, and the victory over debt is going to be that much sweeter.

Some extra factors I think are important to consider & I would like to see in the analysis: Direct Federal loans allow you to extend your due date – so if you fall on hard times & can’t make a payment, but you’ve been paying extra all along, you’re covered in an emergency for those extra months! Paying student loan interest does provide some tax savings – investing in a mutual fund does not.

My motto is the sooner the better, but I do occasionally crave that pair of shoes, so I absolutely understand your point.

Keep up the good work!

Heather Begley says:

I am 21 years old and only 5 months away from my associates degree. I was lucky enough to not have to take out loans because my grants coverage my tuition and books since it was based off of my mothers income which is $0. Of course working a minimum wage job doesn’t get you anywhere but broke all of the time, so about my second year I started taking out loans to help get me by. I now have about $6k in student loans debt, and while that is extremely low compared to most, I feel overwhelmed with it already. I dont want to be 48 and still paying off student loans like my dad is. So even though im doing to get my bachelors degree, I am going to take time off from school inbetween my associates and bachelors to pay off the student loans I already have before going on. I dont want these loans sitting around for another 3 years not have any payments being made on them. The thought of taking out anymore loans at this point makes my stomach feel sour. Alot of my friends, my fiance included, have a MINIMUM of 40k in student loan debt, and the highest I kow of is $60k and I dont want to let it get so out of control that it gets to that point. Studet loan debt is a very scarey thing, its not somehting you can file bankruptsy and get away from, it follows you where ever you go.

Mike Jones says:

Maybe I missed it in the calculations but there isn’t any analysis about taxes and how they impact your return.
$1000 investment at 10% return means $100. Assume 15% capital gain tax makes your return 8.5%

A 8% stock market returns after taxes is 6.8%

Mike Jones says:

My personal belief on paying off student loans. I started with the highest interest rate loans and tried to get rid of them as quickly as possible. Every loan that is paid off is extra money that can be applied to other loans. More importantly it makes you montly expenses lower in the situation where you lose a job or need money for something. (This is a strong argument against consolidation).

Here is my example. My wife and I had a total of 8 loans (private and govt) worth over 100k. Montly payments were about 1100k. We picked a longer repayment option 20 years to protect against emergency. We picked the highest interest loan and worked to get it paid off. This saved us ~$200 in monthly payments. We took that money and automatically applied it each month to the next loan. We will now start working on getting the next highest interest loan paid off on top of the exta payments.

My personal belief on holding debt. Debt is not bad but you really dont want your monthly fixed expense (mortgage, student debt, car, etc..) to get to high. Life is uncertain and you never know when you will lose a job, go on short term disability because of medical conditions. Always ask yoursefl what would you do if you lost 50% of your income (spouse gets laid off) or had to change jobs and took a 30% paycut. In my opinion, emergency funds are fo true emergencies and shouldn’t be touched unless absolutely necessary and as a last resort. Because every dollar you take out of the fund needs to be replaced.

There is nothing more stressful than wanting to switch jobs but unable to do so because of high debt.

My final piece of advice is that when you are planning an emergency fund, don’t forget the cost of healthcare i.e. Cobra.

C Newman says:

I just came across your website and find it very helpful. I am 30 years old, one semester away from earning a Masters Degree, and have a total student loan debt of $20K. I had a $30K balance from undergrad and only took $10K for grad school as a just in case situation that I have not used. I received assistantships to cover tuition and living expenses (thank God!).

I received a small inheritance in 2009 to which I used $16K to pay down all loans accruing interest while I am in school. The remaining balance has $2K accruing interest (~$100 currently) that I intend to pay off before the year is over. My question is: do I pay off the remaining loans before graduation or follow the “I’m young and deserve to live” scenario described in the article.

I rent, have no car payment, and am in good health with no other debt. I split all expenses with significant other who does have loan debt, but otherwise the same scenario as me. Once paid off my liquid bank assets would equate to ~$20K, with other investment accounts such as an RIRA, annuity, and 2 investment accounts split to diversify to account for a downpayment on a house upon employment.

This sounds petty I know after reading other’s stories, but its a constant stress to me as my family has been hell bent on not having any debt. I know how fortunate I am to be in the position I am in. But entering grad school I planned for this setup. Smaller school, general degree, and hard work. Never borrowed more than I needed and have worn the same clothes since middle school!

Thank you!

Brad says:

My wife an dI are drowning in student debt. We are working on paying off all of our loans early and hopefully within 3 years. Feel free to follow our journey at

BNN says:

I agree completely with using “extra cash” to invest rather than paying off student loans. I also consider paying off high interest debt (credit cards, mortgages, etc) as an investment by reduction in accruing interest. According to Dave Ramsey, on of the few debts that is “forgiven” at the time of death is a student loan. So, make payments regularly, and even have an auto-deduction plan (which reduces student loan interest with a lot of providers), but use extra cash elsewhere.

B says:

It is important to take into account the rate of inflation over the time-frame that you plan on paying off your loans. If you have a fixed interest government loan, it may make more sense to ride out the 24yr forgiveness plan. 100k 10years from now will not hold its present value.

Diana Meske says:

Hi, I have similar question…as you are probably aware graduate students no longer qualify for subsidized student loans…I already have a couple of unsubsidized loans from my first two years in graduate school but will be taking out a considerable amount more over the next two years. I also took out a large one my freshman year of undergrad…which I did not make regular interest payments on and watch grow from $8000 to $12,500 over a 6 year period. Since I was able to work and pay for the majority of my undergrad past this loan I took out a couple of subsidized loans so the debt has mostly been shifted that way. However, I am not scared that the loans I have and will take out are going to get very scary very quickly…but with a minimal stipend it is near impossible for me to make interest payments while in school. My question is is there any advantage to paying the interest with what will essentially be other loan money? Thanks for your help!


Tony says:

Why does the author of this article, David Weliver, continue to push the idea that paying down loans early does not reduce monthly payments? I paid $12,000 of a $50,000 private loan, and my monthly payments went down (once the “year” was up – apparently my provider adjusts my payments every year based on the total amount due). Someone else, above, wrote that paying down a loan will not reduce monthly payments only in the case of consolidated loans. That may be true – my loans were not consolidated.

Sean Smith says:

Plain and simple. Debt is debt. Pay off your student loans as quick as possible. Dont worry about the stock market. Interest youll save on student loans will beat the stock market anyday (especially in this depressed economy). Essentially, by paying your student loans off early your investing your money (by avoiding future interest payments).

Dee says:

My son sudent loan was 6% when I signed now it’s 9% can the govement change the percentage on my orginal loan.

fiona says:

Federal student loans are fixed rates, they shouldn’t change

Ray says:

Hey there I am 30 and wife 28. I make 45000 year before taxes and wife around the same. She is debt
free and I have around 65000 in school loans. We live off of her money while able to save around $200
a month. All of my income goes to paying off my loans, I am doing this by paying off Highest percent int. first then moving to the next. Is this a good idea or should we be investing part of my income also?


That is a great question, pay off the debt fast and live tight in the mean time or pay over time and know it will be out there in the future.

I’ll give you my opinion as a tax accountant, but please understand no two situations are alike.

It is a matter of personal preference as to which route to go. There are some people, like myself, who can’t stand having debt. I paid my student loans off very quickly because I didn’t like them looming over my head.

That being said there are some benefits to not paying them off as fast. Mainly you can put the money aside in something else, a Roth IRA, savings account, or some other savings engine. What this will do is allow you to have an emergency fund. The reason student loan debt is sometimes not bad in this case is in the event that you or your wife loses a job you may be able to reduce the payments on the loans or stop them until you get back on your feet. This isn’t a great option as interest will continue to build but unlike credit cards and other debts the student loans have strict rules they have to comply with and if you communicate they will usually help you out.

So I guess my personal opinion, keep paying them off fast but take at least a portion of the money and set it aside. Once you have enough built up to pay it in full you can make the call on small payments or knock it all out at once.

I’m a tax accountant in Chandler, AZ if you have any questions I do work with people throughout the country and would be happy to answer any questions you may have. Just shoot me an email

Ryan Stone
Schneider & Stone PLC
3125 S Price Road
Chandler, AZ 85248

IRS Circular 230 Disclosure: To ensure compliance with requirements imposedby the IRS, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Matthew Johnson says:

Pick up a copy of The Total Money Makeover by Dave Ramsey… You should pay the smallest loans first, forget the interest rate… Don’t invest any money until you have no debts to pay back.

Kev says:

I am recently turned 27 years old and married under a year. My wife had $45,000 in student loans. We made comfortable salaries and have put off buying a house in order to pay the student loans. In just under a year and a half, we plan to pay them off in full. I can’t imagine investing (even conservatively) in the stock market as to paying our loans in full and never having any form of debt, whether good or bad.

Matthew Johnson says:

I believe that you did exactly what you should do in this situation. Once your student loan debt is completely paid-off, imagine how much money you’ll have monthly to put into a retirement account???? Amazing!

Angela says:

My husband and I have set up automatic minimum payments for student loans and invested in a Roth IRA, and a mutual fund for our house savings. We have a nice cash reserve and we do not worry about money. I agree with the author, if you have low interest loans, don’t pay them off early!

BTW- we only have one full time income.

I guess most of the time, the reason why most people are deeply in debt, is because they lack the info and know-how needed to manage their finances well. This blog is quite informative. It gives common people a lot of useful information on how to handle debt issues. I will definitely check out the book you recommended. Can’t wait to hear more from you. Thanks for the info.

Tony says:

In response to “I guess most of the time, the reason why most people are deeply in debt, is because they lack the info and know-how needed to manage their finances well.” I have to say this post is about student loan debt and whether or not to pay it off early. That doesn’t infer that people don’t know how to manage their finances. Sure it’s great to get a few tips here and there but think about what you say before you generalize for the “common people”. Rude.

Faraz says:

I strongly recommend the book called “90 Day Money Challenge”. Stresses the importance of paying off debt, never borrowing afterwards, and good ways to start out in a practical/non-crazy way.
To summarize, do the following IN ORDER, don’t skip any steps.
1) Checking Account Buffer [To pay off monthly bills]
2) $1,000 Starter Emergency Fund
3) Pay off All Debt Using the Debt Snowball Method (pay each debt off from smallest to largest, may not make the most mathematical sense, but you build confidence from knocking out small loans and you use that towards larger loans)
4) Fully-Funded Emergency Fund
5) Down Payment Savings
6) Invest 15% into Retirement
7) College Funding Plans for kids
8) Pay off the House
9) Maximize wealth building and giving

We had more money in student loans than we put into our house, which is pretty intimidating. We used the snowball effect; we paid off the smaller loans first, then used the amount we had been paying for those loans toward the next smallest loan and made bigger payments. We feel that having them paid off sooner (not all at once, of course, that is unfortunately not a realistic option) is better for us, because we want to live debt-free as soon as possible.

k says:

Living a balance between saving and paying off student loan debt is very challenging. My husband and I completed medical professional degrees thus accumulating a large amount of debt. Although we make an excellent living on paper, we live very simply. We found that prioritizing our goals provided peace of mind. We first saved 6 months living expenses. Next we set a percentage of total income for retirement savings. Lastly, we created a budget for daily living (including fun/extras) and use every extra cent we have to pay off student loans early. This will allow us to pay off all loans in 12 years vs. 30 years without over-looking the value of time in investing/peace of mind with freedom from debt.

kebuda says:

Just a note on loan consolidation – for those out there that are thinking of taking advantage of 10-year public loan forgiveness or 25-year forgiveness – your loans must be consolidated.

Colin says:

This is a very interesting and eye opening article for me! I am 27 and went to flight school and private university so accrued about $110k by way of 3 student loans. 1. Perkins loan.- I work in public service so this $10,000 loan is cancelled by the govt at a large percentage each year. Something like 15% yr. 1, 20% yr. 2, etc. so my payment on this is $0. 2. Stafford Loan- was $17,000 @ 3.5% but I made aggressive mayments of about $800 extra/mo. and paid it off last month. 3. Parent Loan for Undergrad Students (Plus Loan)- in my mothers name so does not count against me for debt to income ratio. $82,000 @ 6.5%. Min payment is $531 and my current payment is $1500/month. I am able to comfortably do so as I have no other debt, am single and make ~$115k. I feel like I still have plenty of cash left each month to enjoy myself in addition to saving ~$1000/mo. and contributing 8% to 401k (employer match to 5%). However, I am disappointed with myself in that I only have a 4 month emergency fund, and have no Roth IRA.

After reading this excellent article, I’m suddenly giving serious consideration to taking my $1500 payment down to the min $531 and using the extra $1000 to first fully fund either 6 or 8 months emergency fund. Next, to fully fund Roth IRA and then up my 401k contribution with whatever is left over.

Thoughts and/or advice greatly appreciated! Thanks!

Jen says:

That $82K does count against your mother’s debt-to-income ratio, though. If I had loans in someone else’s name, I would pay them off as quickly as possible so as not to constrain the other person’s possible life choices. Besides, your rate is 6.5%. You will be dragging $82K behind you for years for the chance to make 7% (not guaranteed) over the long term. Seems to me that you could beef up your emergency fund and contribute to your IRA without changing your loan payments (cut spending).

JQ says:

I agree with Jen — as your rate is 6.5%, by paying down the loan it is a guaranteed 6.5% return, versus putting that same money into a 401k or other investment(s) with the uncertainty of greater than 6.5%.

I would also agree with your original assesment relating to your Emergency Fund being at 4 months. It _may_ make sense to pay the minimum student loan payments for several months until your Emergency Fund achieves the 6 month threshold. As you do not have any dependents, I do not think you need more than 6 months sitting in cash — the money would be better used elsewhere.

Also, you mentioned Roth IRA — you are right around the cusp of having too much income to qualify (depending on how many deductions you have). Check into the income limits for a Roth IRA before you set your sights on funding one 🙂

Tim says:

I still owe $75,000+ in student loans and plan on continuing to make extra payments when possible. Personally, I’ll take the guaranteed 6.25% interest “savings” over the stock market gamble… Especially when you factor in the stress of carrying such soul-crushing, non-dischargeable debt for another 20+ years.

shanna says:

Personally I am trying to pay off my student loans as soon as possible. First off I only have 3,000 left on my student loans. I have two loans one with just under 1500 and one just over 1500. My husband and I are currently in our early 20’s and are trying to buy a house. Our main problem is he has no credit, and I have too many lines of credit. He couldn’t put our car in his name, so I had to put my name as the primary so with that on top of two student loans and a credit card, we were told we are too high of a risk. Not that we have poor credit but my debt to income is too high. My minimum payment on my loans is $14 a month for each so, $28 a month, at 6% interest, and I pay $100 a month to the company and they split that between the two loans. Since the car is the only line of credit that my husband has a secondary signer on it, we figured we would remove the student loans quicker and keep the credit card open.

Ed says:

Really? No offense, you hardly have any debt… please don’t feel over burdened. Trying $100k after interest.

Faraz says:

I personally think the priority be to get rid of debt/student loans student loans as fast as possible, right after building an emergency fund. You’re guaranteed to lose your interest rate every single month on your debts. Though the stock market has had a rate of return of 10-12% over the past 80 years, it fluctuates too much and you might not see the benefits for years. Make your goal to be debt free, then you’ll have a lot more of your income to dedicate to whatever you want

Jon Bullock says:

I graduated from chiropractic school about 10 years ago and I’m now 38. I graduated with about 140,000 in debt and chose the forbearance option for a few years. I started to pay interest only and now I’m on IBR or Income Based Repayment. I now owe $145,000. Based on my salary I pay $585 per month and I plan to continue doing so for the next 20- 25 years until it gets forgiven under the plan. I’m married with a 2 year old and 6 month old. I’ve claimed bankruptcy after a failed business and extreme anxiety/depression. My wife and I currently have decent jobs earning approximately 90,000 a year jointly, but we’re still living check to check with not enough to pay more on the loan or put into a savings/retirement/education account. We live in a two bedroom apartment and pay $1600 per month and obviously with a chapter 7 behind me, we’re not going to own a home any time soon. We don’t go out to eat and we don’t go on vacations. On the bright side, we’re making money and paying all the bills. We are all very happy and healthy. Any tips or advice would be greatly appreciated!!

Adam says:

Ive recently been following Dave Ramsey’s book “Total Money Makeover”. Its really great, it sounds like a perfect fit for your situation. I know its helped me, very inspriational also.

Jon says:

Thanks Adam. I see it is on and I will listen to it on my commute for sure.

Posts like this make me so thankful not to have student loan debt. Going to do a similar post about paying off mortgages early?

Mark says:

The math is all the same for mortgages, and if you have a 3% rate like me there isn’t much motivation to pay it off quickly. It’s an ARM, so in a few years the rate may jump to 8% max, and then I would probably start paying it down faster.

The liquidity issue is still a big deal for mortgages, if you put all your money in and then lose your job, you can be foreclosed on pretty quickly. If you had been putting your money in stocks or bonds (I like bonds now, but they probably won’t be as attractive in the future when interest rates start to rise) then you can last months or even years without foreclosing.

jason says:

Another thought is to buy a property that could possibly produce rental income. (make a basement into a rental), buy one with a casita, can a room have a separate entrance? Or, if you are wise, you would not buy until your mort, tax, and ins total are all equal to or under (I’d say 10% is a good number) current rental averages.

Jessica says:

I started grad school while my undergrad loans were still in deferment so that I could delay my initial payments until after I had gotten a raise or 2 at work. This was actually a very strategic process for me, as my undergrad loan payments would have equalled to about $300 a month (which I couldn’t afford at my starting job) and the Master’s loans only added an additional $20K to the loan balance. When they finally all came out of deferment 3 years later, I had gotten a $1400 a month raise after working full-time for that 36 months…all my combined interest rates averaged out to about 7-8%. By the time my loans were coming due, the stock market crashed in 2008…and my higher-risk 401K 2050 target fund has STILL not recovered…This year, the retirement earnings are finally back up to about 4%…after having lost more in 2008 and 2009 than I contributed in each of those years. When my grandfather passed away in 2010, I used a significant portion of my inheritance money to pay off the remainder of the loan balances after making 3 years of payments…and I am REALLY glad I did. Based on the initial balance, I would still have between 3-4 years of making payments, and my investments are not earning me anywhere NEAR what I would have been spending each month in student loan interest. I realize that long-term, I probably would have made that money back when the market recovers…but without any significant job security, I had no idea how I was going to pay that debt when the economy crashed. I would have been stuck with 7-8% interest, minor amounts of cash in the bank earning around 1% a month, and potentially unemployed for an average 9-month job search. The peace of mind the early-pay provided me was absolutely well worth it.

John says:

I would like to know where I can get 1% a month in a bank account 🙂

Mark says:

ING Direct, Ally Bank, Discover, or any of the other online banks are paying just under 1% right now. Some credit unions as well, but it depends on if they are available to you.

Justin says:

My wife and I (late 20s) have rolled our student loan debt into our standard debt payment snowball. AFTER having full 6 months emergency savings and contributing at least 10% to 401Ks, we’ve started making additional payments (along with minimum payments) to knock off our student debt (only other debt – 1 low interest used car purchase. We bought a home 3 years ago, so we have our mortgage too.)

We found this to be the best balance for us of saving for our future, reducing debt faster (to prepare for future child costs), and still having some cash to have fun while being young.

Zach says:

I just started my TMM. I’m glad to see you customized it to fit your needs. Its always a trade off : paying off student loans, debt, saving for a house and family as well as enjoying being young!

Robert S says:

Would your advice apply to a high-debt, high-income individual as well? I will be starting a six figure job in a few months, but have about 1.1 times as much student loan debt and no other debt to speak of. I would rather be very aggressive with my student loan payments, especially given the unstable job market. With a 150K debt growing at around 9% for the highest loans, I would feel irresponsible letting my loans accrue interest while my income is subject to the whims of the stock market. My current plan is thus letting my emergency fund grow to where it needs to be, then being aggressive with student loans.

Need I go all in? Should I concentrate on, say, getting my down to about 100k and then investing?

Drew says:

Your best bet would be to prioritize your money usage as follows:

1) Build up a 6 month emergency fund
2) Contribute to your 401(k) up to the employer match (100% return on investment)
3) Pay-off student loan debt
4) Invest in IRA once debt is paid off

Right now, the market is extremely volatile, so for the short term it is better to pay down the debt, especially at 9% interest. You can modify your plan in the future if we enter back into a stable bull market, but until then it is better to pay off the debt.

Also, given your income (and assuming you don’t live in NYC), you should easily be able to live off of half of your take home pay and erase the debt without having to go onto a full beans & rice lifestyle. You’ll probably bring home ~ $7300 a month after tax, benefits, and 401(k) contribution. If you live on half of that, then it will take you 6 months to build your emergency fund and only ~3.5 years to fully pay off your student loans.

David Weliver says:

Robert S two points that your question brings up.

1. As Drew and some others point out, the stock market is really volatile right now and honestly has had a lousy 10 years. This why our generation is hesitant to see investing in stocks as a better move than, say, paying down a 7% loan early. I’m an optimist, however, and believe than in the 30-40 year timeframe we should be investing for, we’ll get a good return in the stock market.

2. Robert you say “I would rather be very aggressive with my student loan payments, especially given the unstable job market.”

Perhaps I’m wrong but I’m guessing you’re worried about your future job security. In that case, I would actually see that as a reason NOT to pay down loans and instead hang onto your money. Again, because paying off your loan early does not reduce your monthly payments, only the principal. So if you pay down loans early and lose your job, you’re still stuck with the regular loan payment and have less money in the bank to get you through a period between jobs. My two cents.

Denise says:

Thanks for this post, David. My husband and I are both in our late 20s and are considering buying a home in the next few years, which is why we’re trying to pay down our loans early. Fortunately, neither of us has a large balance remaining, but we would feel more comfortable having our loans paid off before we embark on the journey of home ownership. We love to travel and would like to own a small home and not be so burdened with debt that we can’t enjoy life. I like the idea of beefing up retirement savings, and I know that student-loan interest is deductible, but there’s also a sense of satisfaction that comes with paying off those debts. Right now, we are trying to figure out how to balance paying down our debts (besides the student loans, we have no credit card debt and have only a small car loan with a 0% interest rate) with saving for a house downpayment.

Some college graduates even seem bitter about their student-loan debt (particularly those who have larger-than-average balances). I’ve met some people who refuse to consolidate or change repayment plans because, though these options can reduce their monthly payment, they would end up paying more in the long run. While I can understand their reluctance, I wouldn’t put a few thousand dollars in interest paid over the course of 10 or 15 years ahead of, say, medical expenses. If going on an income-based or extended repayment plan, consolidating loans, etc. allows you to pay for your needs today, why not do it, even if you spend more in the long run? What are the financial, physical, or psychological costs of going without health care, charging necessities like groceries or gas on a credit card, or struggling to make ends meet for a decade?

Jessica says:

There aren’t any pre-payment penalties with most consolidation programs…so you can continue to make the higher payment that you would with the separately serviced loans…you just get the added benefit of making 1 payment with 1 lender and perhaps a longer payment term. I’m also a fan of financing the 30 year mortgage and paying at the 15 year rate if you can afford it when you don’t qualify for the best available 15 year rate…

Kevin says:

You really have to watch out with consolidation though. One of the issues presented was that extra payments don’t reduce your loan payments, they just shorten the term. Well, this is not necessarily true if you haven’t consolidated and is actually a great reason to forego consolidation. I have about 12 loans all through Direct Loans and with several different interest rates (7.6, 6.5, 2.2; they stem from different promissory notes during different school terms, including undergraduate and graduate school). The servicers keep trying to get me to consolidate, but there doesn’t seem to be any benefit to consolidation in that situation.

For one, having them separate allows me to direct any extra payments to a specific, higher-interest loan. This, in turn allows you to save the most in interest on any additional payments made. But another benefit is that if you need to get your loan to income ratio down, you can focus all your energy on paying one loan, which will lower your monthly payment instead of just shortening the term (which is what it would do if you consolidate) once you pay it off.

I’m not saying that consolidation can’t be good, or even good for some loans and not others, but it’s really necessary to factor in all the possibilities before making a decision. Many loan servicers try to convince you that it’s the best option for everyone (likely because it reduces their costs to service the loans), but, in fact, it can hinder some of your future plans in some instances and it pays to be informed before making that decision.

Denise says:

Kevin, you’ve raised some really good points. You’re right that loan service providers tend to tell everyone to consolidate, even those of us who only have a few small loans! Like you, I prefer the ability to pay off my loans one by one.

I’ve never consolidated because I only have a few loans from grad school (none from undergraduate) and my payments aren’t that high. I wonder about people whose loans have higher interest rates and who are paying closer to the $1,500-2,000/month mark for their payments, especially people who’ve been through grad school and have years of loans–those who can’t afford to pay extra every month and who are sacrificing other necessities for those high payments. It is very situational.

Kelly says:

Something of note is the current program sponsored by the government whereby if you work in non-profit and utilize the ‘income-based’ loan repayment plan, after 10 years of consecutive on-time payments your remaining loan balance will be forgiven. Great for those of us who are serving in non-profit and therefore aren’t making a ton of money to begin with, and allows us to save money on the side for other things and not rush to pay down loans. Hopefully after the 10 years, I’ll have saved enough money for a down payment on a property, and will have freed up my monthly loan payments to go towards a mortgage.

LG says:

Where do you go to find information on this government plan??? My husband and I each fit this description and have $65,000 in student loans!!!

Denise says:

Good point, Kelly! And I think anyone on an income-based repayment plan who has a balance remaining after 25 years, regardless of where they work, can qualify for loan forgiveness–if they make their payments on time.

LG, you can find more info by visiting the U.S. Department of Education’s website and clicking on the “Public Service Loan Forgiveness” link.

Sean says:

My fiancee and I are getting married June 8, 2013. We are working on paying down student loans ($83k worth) with a little extra towards payments each month since right now our main goal is having our wedding fully paid for prior to so we don’t need a loan.

Your comments about buying a house really hit home (no pun intended lol) for me. Our salaries are not “stellar” but we easily afford our bills, however we do not have enough left over each month to “comfortably” afford a house. Unfortunately it means we need to pay some low interest loans off first as that will free up the most money up the quickest each month. Once we are able to find a duplex (want to start early in real estate investing) and move in, my plan is to jump right back into paying extra on the highest interest loans first.

I agree with the “enjoy your money” now. I am putting about an extra $200-$250 each month which still allows us to have a few hundred dollars to go into saving and discretionary but also is helpful and allows us day trips down the shore and fun things like that. We are budgeting and saving a ton, but we also really believe in enjoying our lives and fun times with friends. Thanks for the great article.