Smart Money Podcast: ‘Should I Invest or Pay Down My Student Loans?’

Sean Pyles
Liz Weston, CFP®
By Liz Weston, CFP® and  Sean Pyles 
Edited by Rick VanderKnyff

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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions — in 15 minutes or less.

This week’s question is from Kelly in Sacramento. She asks: "My tech company offers stock options, and there is so much hoopla over them in the Bay Area. I don't know if I should even exercise [the options] given my $90,000-plus student debt, but at the same time have FOMO.”

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Our take

We get the FOMO (fear of missing out)! You don’t want to miss an opportunity, but you also don’t want to have student loans for the rest of your natural life. This is all about balancing financial priorities.

Companies offer stock options as a way to attract, reward and retain employees. There are a lot of different ways stock options can be structured, but in general the company is giving workers the right to buy a certain amount of stock at a discounted price. The hope is that that stock will then rise in price, so the employee can sell the shares and pocket the difference.

Employee stock options come as a grant that limits how much stock you can buy, and a vesting schedule that gives you ownership of that stock over time. This is an incentive to get you to stick around.

You can buy the stock (also known as “exercising the options”) and hang on to it, but that could mean tying up a lot of money. You also can wait to buy the stock until you’re ready to sell it — when the company goes public, for example. You don't have to lock your money up for months or years waiting for something that might not happen.

It’s important to keep in mind that there are no guarantees. The stock price could rise in value a lot or a little, or it could fall and make your options worthless. Also, you don’t want too much of your investment portfolio to be tied up in the same company that employs you. If your company goes belly up, you could lose your job and the money you invested.

In addition, there are a lot of tax implications with stock options, so you’ll definitely want to hire a CPA or other tax pro to provide guidance.

At NerdWallet, we recommend people get on track with their retirement savings, pay off toxic debt such as credit cards and have an emergency fund before they think about other investing or making extra payments on their student loans or other relatively low-rate, tax-deductible debt. If your student loan debt doesn’t feel manageable, look into income-driven repayment plans for your federal loans and possibly refinancing any private student loans. If your debt feels manageable and you want to exercise some options, just remember to talk to that tax pro first!

Our tips

Stock options can be structured a lot of different ways. Be sure you understand how your company treats options, and consult a CPA or other tax pro about the tax implications.

Emergency funds, retirement saving and getting rid of high-rate debt should be top priorities. Only after those bases are covered should you think about investing more or making extra payments on low-rate, tax-advantaged debt such as student loans or mortgages.

Stock options offer special rewards and special risks. Everyone hopes to get rich with their options, but it’s important to limit the part of your investment portfolio that is invested in your employer.

More about financial priorities (and finding a tax pro!) on NerdWallet:

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Liz Weston: Hello, welcome to the NerdWallet Smart Money podcast, where we answer your money questions in 15 minutes or less. I'm your host, Liz Weston.

Sean Pyles: I'm your other host, Sean Pyles. As always, be sure to send us your money questions. You can call or text the Nerd hotline at (901) 730-6373. That's (901) 730-NERD. Or you can email us at [email protected].

Liz: This episode, we've got a really interesting question that'll be familiar to anyone who's worked at a startup. It comes from Kelly in Sacramento. She asks, "My tech company offers stock options, and there is so much hoopla over them in the Bay Area. I don't know if I should even exercise [the options], given my $90,000 student loan debt, but at the same time have FOMO.” That's fear of missing out, for any of you who don't know. “Most of the people I work with in tech are lucky to have no debt, as their parents paid for all of their college.” Lucky people. “It is a private company, so I can't just sell my options on the open market. What's your advice?"

Sean: Oh boy, Kelly. So you're dealing with student loans, but you also want to try your hand at investing. It sounds like we have some similar financial journeys here. I also have that FOMO. I don't think that we're alone with that. And Kelly, I really like your question because it's about balancing financial priorities. Should you pay off your student loan debt, or should you spend some of that money on your company's stock options? And how should you even think about handling your stock options? It's a pretty tricky question all around.

Liz: Fortunately, at NerdWallet we love tricky questions. We also have some guidance for how to balance those competing priorities. In this episode of the NerdWallet Smart Money podcast, we're going to talk with Investing Nerd Arielle O'Shea, to help us understand stock options and how to think through competing financial priorities.

Sean: Okay, let's get on with the show.

Liz: Hey, Arielle, thanks for joining us.

Arielle O'Shea: Thank you for having me back.

Sean: I'm so glad to have you here. OK. Arielle, can you please start by giving us a brief explainer of what employee stock options are?

Arielle: Yes. Stock options are just one part of a compensation package that an employer might offer you. Like Kelly said, they're very common at startups, but they can be offered by other companies as well. What they do is they give you the right to buy the company's stock at a specific price during a specific period of time. Let me make sure this is understood, because it's really important, and I was actually confused by this at first, too, when I first was offered stock options. It's the option to buy the stock, but the company isn't giving you the stock. You have to actually pay for it, which means you need money to exercise the options.

What they're giving you is the right to buy the stock at what is hopefully going to be a discounted share price, and a price that's going to remain a discount. If you buy the stock, you're exercising your options. Then the hope is that that stock will then rise in price even further, so then you can turn around and sell the shares that you purchased at that lower price and pocket the difference. Employee stock options come as a grant. They're called a stock grant. The grant is going to limit or set how much stock you are being offered to buy. There is going to be a vesting schedule that's going to limit when you can buy that stock.

Liz: Grants, and vesting, and exercise, oh my. Those are a lot of terms that people might not be familiar with. Can you give us an example?

Arielle: Sure. Let's pretend Kelly got a grant of 2,000 stock options, and the company says it's on a four-year vesting schedule. That means that she has the right to "exercise," and exercise just means buy, the stock over a four-year period of time. A really common vesting arrangement is 25% per year over that four years, which would mean Kelly could buy 500 options after her one-year work anniversary. Then she can buy 500 more each year after those four years. Then she will be fully vested in the stock, and she will have purchased all of her options. But that's just one way stock options can be structured. There are a lot of other ways. It varies a lot by company.

Sean: Okay. It seems like the long and the short of it is that, to entice employees and have them play the long game with the company, the employees are invited to buy a little piece of this company hoping that one day the company is worth a few billion dollars, so that eventually after you buy the stock, you can then later on sell it and buy yourself a yacht and sail off into the sunset. Just to simplify this whole process.

Arielle: Yeah, that's definitely the hope. I would say that might be a slight oversimplification. Because it doesn't always work out that way. We all want to sail off on a yacht, but there are some important things that people should know. If the company is already public, it's a little bit easier to understand. Public means the shares are already traded on a stock exchange, so you know how much those shares are trading for. You could theoretically exercise your options, and then sell them the same day. You would do that if you were going to make a profit.

But if the company is not already public or there aren't ready buyers for that stock, then you can buy the stock and hold on to it. Or you can wait to buy until there's an opportunity to sell. You can buy the shares as your options vest, but some companies actually will let you buy them before you're vested. This is called early exercise. There are some tax advantages to that, so find out if your company offers that. If you do want to buy the stock, that's something that you should look into.

Sean: Yeah. One thing I want to touch on is that there's actually no guarantee that the stock will actually become more valuable than the price that you bought it at. Right?

Arielle: Right. There is no guarantee. You could make a lot of money by purchasing the stock, or you could make a little, or the options could end up worthless. In fact, really the only guarantee is that there are serious tax implications to all of this. If you have stock options, you should also have a CPA to give you advice about them. That's really important.

Liz: Arielle, what's the best way to approach this for most people?

Arielle: In general, the buy-and-hold method makes sense when the share value of the stock is really cheap and you have faith in the company's long-term growth prospects. If you're paying very little per share, you're not risking all that much money, and you can get favorable tax treatment if you buy and hold the right way. Again, talk to that CPA. Otherwise, you might want to wait for some sort of liquidity event exercise.

Liz: That's really important. You can always wait and buy the stock when the liquidity event happens. When there's an IPO, for example. You don't have to tie your money up for months or years waiting for something that might not happen.

Sean: OK, I just want to take a step back. I will say that is a lot to digest. If anyone is feeling a little overwhelmed by all of that information, just go back and rewind. We won't even know that you did it. Or you can also check out our show notes post at for more info.

Arielle: Did we mention you should also talk to a CPA?

Liz: Seriously. Stock options are one of those areas where you really need the help of somebody who lives and breathes taxes. This is just not DIY territory.

Sean: Right. That's a really good disclaimer as well. Talk to that CPA, because they are the experts in this. Now let's turn to the second part of Kelly's question, how to balance the competing financial goals of paying off student loan debt and wanting to invest. Liz, what are your thoughts on this?

Liz: Basically, you don't want to put off investing until you're completely debt-free. That's because it just takes too long for most of us to get out of our debt. It could take decades. You could be passing up great opportunities in the meantime. Here's how we break it down at NerdWallet. We suggest people start with a starter emergency fund. That's like $500. You don't have to save up the three months' worth of expenses or whatever you've heard. You just need something to get started. Next, we want you to take full advantage of any 401(k) match you have at work. That's free money. Don't leave that on the table. Number three, now you focus on paying off toxic debt. That's credit card debt, payday loans, anything with a higher variable interest rate is something that you should focus on paying off. After that's taken care of, then you kick up your retirement savings and your emergency savings. You'll notice that paying off your mortgage early, paying off your student loans early, that's not on the list until we get to this point. Till you have all your other financial ducks in a row, don't worry about making extra payments on the mortgage or the student loans. Now, again, this is general advice for most people. Your situation could be different, so keep that in mind.

Sean: One thing I would love to add on to that is that paying off toxic debt with a high interest rate is, in a way, a form of investment. Because once you have that debt paid off, you won't be spending as much money monthly on the interest rate to whatever company you owe money to. That is really valuable.

Liz: Yeah, exactly.

Sean: Arielle, one thing I want to ask you about, I've also heard the argument that by spending most of your waking hours working at a company, that in itself is a form of investment. It's not paying dividends per se, but at least it's paying your rent this month.

Arielle: Right. It kind of is paying dividends in a way, because you're getting those regular paychecks, which are what dividends are. But this is a really important point, and I'm glad you brought it up. It is so important to limit the part of your investment portfolio that's invested in your employer for that very reason. If your company goes belly up, you could lose your job, which means that paycheck dries up, and you could lose the money you invested in the company's stock. You're really hit both ways, and that can be really damaging.

Sean: Yeah, that's a really good point there. I do want to touch on student loans here, because $90,000 is a lot of student loans. I have a fraction of that, and it does hurt me every month to pay it, so totally sympathize with you, Kelly. But if you want to make your payments a little more manageable and you have private student loans, maybe look into refinancing. If your loans are federal, I'm going to guess that you're probably best on the standard payment plan, but also income-driven plans can help if you are struggling to afford your student loan payments. We have more details on student loan tips on our show notes post at All right, Kelly, well I hope that helped answer your question. With that, Liz, let's get to our takeaway tips.

Liz: Absolutely. The first most important thing is, with stock options, make sure you understand the terms of your company's arrangement, because they're all a little bit different, and get a tax pro's help. Again, this is not something you should be doing on your own. Number two, the financial priorities part, paying off debt versus investing. You want to take full advantage of any company matching a 401(k) and pay off toxic debt like credit cards before you make any extra payments on student loans or mortgages. You do want to do some investing while you're paying off debt. You should not just do one goal at a time, because it just takes too long to get that debt paid off in most cases.

Sean: All right. That is all we have for this episode. Again, if you have a money question of your own, turn to the Nerds and call us or text us your questions at (901) 730-6373. That's (901) 730-NERD. You can also email us at [email protected], and visit for more info on this episode. Remember to subscribe, rate and review us wherever you're getting this podcast.

Liz: Here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general education and entertainment purposes, and may not apply to your specific circumstances.

Sean: With that said, until next time, turn to the Nerds.