Pay School Loans Or Invest?

Hey, what’s up, John Sonmez here from simpleprogrammer.com.
I got a question about paying school loans or investing.
This is a good question.
It’s not always so obvious.
There’s a lot of details that can determine whether or not this is—it’s smart to do
one thing or the other.
He says here, “Hi John, I currently have $31,000 in student loan debt at 4.57% interest.
I have no credit card debt, and no other debt.
I’m already maxing out my 401K and I have over 3 months of living expenses saved up.
I have the opportunity o pay my school loans off by the end of the year.
Is this a good idea?
If there are any policies that eventually alleviate school loans, I could miss out on
opportunities to invest in a software business or real estate.
Thanks in advance for your input.
Best regards, Victor.”
Okay, so Victor, just to recap here, he’s got $31,000 in student loan debt at 4.5% interest.
He’s got no credit card debt.
He’s maxing out his 401K and all that and 3 months of living expenses saved up.
He wants to know if he should pay off the school loans he could do by the end of the
year.
The big thing here is this, right, this is kind of the principle behind this is what
you want to do is you want to figure out—you want to pay off debt—okay, you don’t want
to have debt unless that debt is actually earning you money than its costing you.
Let’s say—in this case he’s got an interest rate of 4.57% I’m assuming per annum, per
year on 31,000.
We could calculate, I’m not going to do the calculation now, but you could calculate
and you could figure out, “Okay, well, how much is he paying in interest per year, 4.57%,
how much money is that?”
Now, if he took that money that he would be paying to pay those payments—pay that $31,000
if you’re thinking about paying it off.
If you took that money and you invested it somewhere else for a year would it yield higher
than 4.57%?
Because if it did, just as an “as if” let’s s ay that you get 10% on that money,
well, what you could do is you could invest that $31,000 that you were going to use to
pay off the student loan, get 10% on that and then take the money that you make on that,
that 10%, everything about 4.57% and you could actually pay down the student loan whatever
extra money that you make and still make money and still be in a good situation.
You’re essentially using that 4.57, you’re going to clear whatever—you’re going to
pay interest on the 4.57% of the 31,000 but you’re going to make interest on what the
difference is between that 4.57 and the 10%, so 5.25%.
That’s the key there.
The question is can you find an investment that’s going to earn you a 10% return?
I personally think real estate is an investment that could do that, but are you willing to
do that?
Is that what you’re wanting to do?
If you’re doing it about just investing it in mutual funds or stock market, you’re
not going to get that kind of return.
You’re not going to get a guaranteed kind of return.
It’s not going to be enough and you’re going to pay taxes on it so it doesn’t make
sense.
I would lean heavily towards paying off the student loan and getting that cleared out
especially now because right now interest rates in banks are low, you’re not going
to make money putting money into the bank.
There’s not a lot of places that you could invest securely that you’re going to guarantee
a higher rate than 4.57%.
If you think of it this way what you’re doing when you’re paying off the student
loan is you’re essentially earning the 4.57%, because you’re saving 4.57% in this case.
That’s what you want to think about is just think about it that way.
That’s why if you have credit card debt and you’re—some people say, “Okay, well,
save money and solely pay off your credit card debt.”
No, no, no.
Don’t save money until you’ve paid off your credit card debt because you’re paying
interest on that.
You’ve got to pay off that first.
You want to maximize that.
If you’ve got multiple—a lot of you have multiple debts, look at each debt and see
what the interest rate is on that.
When I was paying off my properties, I have a lot of real estate, I’ve paid off a lot
of those properties.
I didn’t just pay off properties randomly.
I paid off the higher interest rate ones first because that makes sense.
Some of the properties I’ve actually held on, even though I had the cash to pay them
off, I’ve held on to the loan because if I’ve got a lot at like 3% I can easily make
more than 3% on an investment so I’m going to do that.
So think about it that way.
This is kind of—the key thing is that you want to weigh it against what you could possibly
invest in.
Now, would you have some kind of opportunity that might come up where you could invest
in some startup or something like that?
Possibly, but do you want to take the risk there?
That’s going to be—if you pay off your student loan you’re guaranteed going to
save you 4.57% interest on $31,000.
That’s guaranteed what you’re going to earn.
If you take a risky investment that might yield 5, 10%, 20% it might give you zero and
then you’re still going to be paying the student loan debt as well, so you’re going
to end up in the negative.
Don’t take one of those opportunities and think that you’re going to miss out.
Pay off the student loan especially if you can do it in 1 year, unless you’ve got something
solid that you’re going to invest in.
if you’re going to buy a duplex, you’re going to buy some real estate, again, if you
want to check out my info on that, I actually have a real estate course for software developers
specifically.
You can check that out and I’ll give you some straight up advice that I think could
be the 4.57% interest on your student loan.
But if you’re not going to do something like that that’s going to be very secure,
then I would just say pay it off, but always use that principle to evaluate it.
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Take care.

Pay School Loans Or Invest?

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