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Should You Pay Off Student Loans or Invest?

Save at least $500 and get the employer match on your 401(k) before using extra money to pay off student loans or invest.

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The question to ask isn’t whether to pay off student loans or invest. It’s actually how much you have saved for emergencies. That should be your top priority.

While it feels good to pay off student loans fast, other goals should come first: Aim to save at least three months’ worth of expenses for emergencies, save 10% to 15% of your income for retirement and pay off your credit card balance each month.

Once you hit those targets, here’s what to ask to decide whether to use any leftover money to pay off student loans or invest.

What are your student loans’ interest rates?

A conservative but plausible return on investments is 6% per year. If your student loan interest rates are higher than that, you’d save more money by paying them off — and avoiding interest charges — than by investing.

If your student loan interest rates are less than 6%, putting extra money toward retirement or a brokerage account for nonretirement investing is a better bet. Over the long term, your investments will probably earn more compared to the savings from paying off those loans.

If your student loan interest rates are less than 6%, putting extra money toward retirement or a brokerage account for nonretirement investing is a better bet.

After all, if you’re knee-deep in student loans, you’re likely also knee-deep in the middle of the most important time to invest for retirement. By investing when you’re young, you also give your money more time to grow. See how much you could gain by using a retirement calculator.

Are your student loans federal or private?

Federal loans generally have lower interest rates than private loans and come with more benefits, like income-driven repayment options. If you have only federal loans, investing rather than paying them off likely makes more sense.

If you have private student loans, you have less to lose by prioritizing their repayment — and potentially more to gain by refinancing. Student loan refinancing can decrease your interest rates, letting you pay loans off faster and free up money for other financial goals, like investing.

Refinancing will save you the most money if you have a credit score at least in the high 600s and stable income. Refinancing federal student loans can be risky because you’ll lose repayment options and other protections. Be sure you won’t need those benefits before going this route.

How determined are you to pay off student loans early?

Some people are more focused on being debt-free than others. If paying off student loans early is a major personal goal — and doing so would bring you more joy than having a hefty investment account beyond your retirement savings — go for it.

You’ll have to pay more than the minimum to get rid of your loans fast, so make it easier by opting for biweekly payments, rather than monthly. Some lenders will let you make multiple payments a month automatically as well.

Apply tax refunds and extra income from side jobs to your balance, and take advantage of an employer student loan payoff program if one is offered where you work.