Should I invest my money, or pay off student loans with a variable rate currently at 4%?
June 30, 2010 by admin
Filed under Student loans
Obviously, if the Student loans had a FIXED rate of 4%, this would be a no-brainer, and I’d invest the money rather than paying them off.
But it’s a variable rate (pegged just a bit above the prime rate), so without question the rate will be higher in the future.
So what should I do? Invest the money (probably in the stock market through low-fee index funds, which should return about 11% over the long term)? Or pay off my Student loans (which have an interest rate that will probably double compared to what it is now)? What would YOU do?
Thanks!
There’s no guarantee the stock market will earn 11%, in fact you could lose it all. Do you have the cash flow to cover your monthly expenses, including the student loan payment, if you tie up this money in the stock market?
I don’t like to gamble my money without a safety net. The student loans will never go away regardless of financial hardship. I would build an emergency fund and examine my budget to see if I could cut spending. I would put at least some money toward the student loan to take advantage of the low APR. Because of compound interest, this would reap more than 4% return in the long run (or 8% if the APR doubles). If the loan balance is low, I would pay it off and be out of debt.