Stock Market Today

(I’m looking at about $15,000 in federal student loans. I believe the current rate is around 7%, but I’m hoping to consolidate and get it down to 6%.

Should I pay it all off in a hurry and then get to investing, or are there certain type of investments that are worth getting into right away?

Thanks!）

Answer：
It does depend a little on how good of an investor you are. The better you are, the more likely you shouldn’t pay off your loan.

But even if you suck at investing, there’s a great argument to not pay off the loan.

The loan’s interest is 6 or 7% per year in expense you have to pay. But, you get a tax deduction each year for that interest expense, so after tax, you could fairly reduce the interest expense by a half percentage point per year. So, it may be costing you only 5.5% per year after taxes if you consolidate.

On the other hand, stocks will return even an idiot 10% per year as long as they hold an index or mutual fund with no or low expenses. Paying off the loan will force you to incur a large opportunity cost.

So you will become wealthier over the long term if you use your money to invest in stocks rather than pay off your loans. The difference is 10% per year minus 5.5% per year = 4.5% per year better.

That 4.5% difference per year compounds too, so if you took say 15 years to pay off your loan, that 4.5% spread per year would result in 1.045^15 – 1 = 93.5% before taxes, and about 80% after taxes.

So, if you do invest, you’ll be almost twice as rich buying stocks vs paying off the loan.

The only consideration here is: Can you afford the leverage? In other words, can you afford to make your student loan payments? If so, stocks are the better way to go.

One more consideration: Margin loans to buy stocks usually charge interest rates of 7-8% and the interest isn’t tax deductible like student loan interest is. So you could look at it like you are actually getting a government subsidy to invest in the stock market that is tax deductable.