One of the most important aspects of creating and sharing our perspective on markets, business and the economy is that it results in often intelligent (sometimes not very) conversations that reveal multiple perspectives. Historically accurate investing requires appreciating and understanding all viewpoints and having well thought out debates. No one party knows everything at any one point in time.
One interesting comment we received on our student loan article is that borrowers should invest their capital instead of paying off their loans. This depends on the interest rate on the loan and the expected rate of return. If you have a low interest rate, it could be argued that paying the minimum on the loan and investing the capital instead would be a better use of funds. You can deduct the interest you pay on student loans from your income taxes. The key is to get compound returns working for you instead of against you as we demonstrated in a previous article. This is also why credit card loans can be so deadly. The money you owe multiplies quickly if you’re only making the minimum payment. The other critical factor with student loans is being able to save money in addition to paying the loan off each month.
Example Where It Makes Sense To Invest
In our previous mock example in the article student loan, the student loan payments were $295.88 per month. If you make $60,000 and live in NYC, your income after taxes is $46,000 which is $3,833 per month. The mock monthly budget has $1,700 going to rent, $400 to food, $300 to utilities, $100 for transportation, $400 for miscellaneous items such as healthcare and the internet, and $300 for entertainment. In this example, the person has $633 left over to invest/save or put towards student loans. As we mentioned, for a 15 year loan with a 4% interest rate, the total spent is $53,257.53.
If you decide to pay the loan off in 5 years by paying $736.66 per month and $44,199.65 in total, you save $9,057.88 in interest. One important factor to understand is that money saved is guaranteed, while the returns you get when you invest aren’t. If you take that extra $440.78 per month that you decided to put towards you loans to pay them off in 5 years and instead invested that money with a 6% annual return, you would have $30,753.23. The returns are much higher than the interest saved. This is why the commenter said those with student loan debt should invest their money as we pointed out in the beginning of the article.