Should I pay off my student loans or invest?

Student loans and investments are prevalent topics in the financial world, as most of us have or know people who incurred student loan debt at some point during our education. Whether or not you should repay your student loans quickly once you become financially able is commonly debated. I know some physicians who still have student loan debt after being in practice for fifteen years. Is that financially prudent?

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There is a psychological benefit to debt repayment.

Dave Ramsey calls this the “debt snowball”. His intended audience seems to be people who are drowning in recurrent credit card debt, bartering their leveraged homes through reverse mortgages, and doubling down their vehicles with title loans. I hope that no respectable professional ever comes close to these financial situations. However, there is validity in the psychological benefit of having no debt.

Everyone is different. I know that I don’t like carrying debt no matter how low the interest rate is (maybe except for 0% interest loans). If you know that you’ll sleep better at night after repaying off your debts, do it. Interest rate arbitrage is not worth losing sleep over.

If you operate solely through numbers and know that you have enough discipline to leverage your low interest debt to win big through investments, by all means do it. Be sure to justify your effort through your hourly rate. This leads me to the second point:

Are you actually going to invest your disposable income?

Suppose you have an extra $2000 a month of disposable income after your living expenses. Most people would likely keep the money in a savings account and use it for discretionary spending (read: nice summer vacation in the Seychelles). Others would consider saving for a downpayment on a new home.

How likely would you redirect these funds to repayment of your student debts? How about investing in your favorite funds or stocks? The problem with investing your excess cash is the time commitment and discipline that you need to make the appropriate choices. Admittedly, this is not difficult—much easier than studying for your USMLE Step 1—but you still need to allocate time to do it.

Alternatively, will you throw this money into a Roboadvisor service like at Motif or Personal Capital? How certain are you that you will actually beat the interest rate of any of your outstanding loans after taxes?

Pick the option that suits your needs.

One of the worst financial moves in this situation would be to have absolutely no plan. Your plan does not even have to be financially sound, but if you are in debt you should figure out when and how you intend to get yourself out. My suggestion is that if you absolutely have no clue what to do, pay off your student loans as long as you have the means. This can be as little as several hundred dollars extra per month or as much as tens of thousands a month. Keep doing it until you decide otherwise. Who knows, you might be out of debt by the time you figure out a plan!

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