Should I Pay Off my Student Loan Debts First or Invest in an Index Fund?
You are on the right track with your math, but be wary of your assumptions. If you can borrow money at x% (and can afford to make payments on the debt), and you can get a return of > x% from investing, then you would make more money by keeping the debt and investing your savings. Another way to think of it: by paying off the debt you are getting a guaranteed 5% return because that's the rate you'd have paid if you kept the debt. Be wary of your assumption of getting a 10% return in the S&P 500. Nothing is guaranteed, even over the long term. Actual results may well be less, and you could lose money. It doesn't have to be all-or-nothing: why not pay off the higher rate debt at 5% and keep the 3% debt? That's a guaranteed 5% return by paying off the NSLSC loan. And 3% is a pretty low interest rate. If you can afford to make the payments, I see nothing wrong with investing your savings instead of paying off the loan. Make sure you have an emergency fund, too. "A major thing to consider when deciding whether to invest or pay off debt is cash flow. Specifically, how each choice affects your cash flow, and how your cash flow is affected by various events. Simply enough, your cash flow is the amount of money that passes through your finances during a given period (often a month or a year). Some of this is necessary payments, like staying current on loans, rent, etc., while other parts are not necessary, such as eating out. For example, you currently have $5,500 debt at 3% and another $2,500 at 5%. This means that every month, your cashflow effect of these loans is ($5,500 * 3% / 12) + ($2,500 * 5% / 12) = $24 interest (before any applicable tax effects), plus any required payments toward the principal which you don't state. To have the $8,000 paid off in 30 years, you'd be paying another $33 toward the principal, for a total of about $60 per month before tax effects in your case. If you take the full $7,000 you have available and use it to pay off the debt starting with the higher-interest loan, then your situation changes such that you now: Assuming that the repayment timeline remains the same, the cashflow effect of the above becomes $1,000 * 3% / 12 = $2.50/month interest plus $2.78/month toward the principal, again before tax effects. In one fell swoop, you just reduced your monthly payment from $60 to $5.25. Per year, this means $720 to $63, so on the $7,000 ""invested"" in repayment you get $657 in return every year for a 9.4% annual return on investment. It will take you about 11 years to use only this money to save another $7,000, as opposed to the 30 years original repayment schedule. If the extra payment goes toward knocking time off the existing repayment schedule but keeping the amount paid toward the principal per month the same, you are now paying $33 toward the principal plus $2.50 interest against the $1,000 loan, which means by paying $35.50/month you will be debt free in 30 months: two and a half years, instead of 30 years, an effective 92% reduction in repayment time. You immediately have another about $25/month in your budget, and in two and a half years you will have $60 per month that you wouldn't have if you stuck with the original repayment schedule. If instead the total amount paid remains the same, you are then paying about $57.50/month toward the principal and will be debt free in less than a year and a half. Not too shabby, if you ask me. Also, don't forget that this is a known, guaranteed return in that you know what you would be paying in interest if you didn't do this, and you know what you will be paying in interest if you do this. Even if the interest rate is variable, you can calculate this to a reasonable degree of certainty. The difference between those two is your return on investment. Compare this to the fact that while an investment in the S&P might have similar returns over long periods of time, the stock market is much more volatile in the shorter term (as the past two decades have so eloquently demonstrated). It doesn't do you much good if an investment returns 10% per year over 30 years, if when you need the money it's down 30% because you bought at a local peak and have held the investment for only a year. Also consider if you go back to school, are you going to feel better about a $5.25/month payment or a $60/month payment? (Even if the payments on old debt are deferred while you are studying, you will still have to pay the money, and it will likely be accruing interest in the meantime.) Now, I really don't advocate emptying your savings account entirely the way I did in the example above. Stuff happens all the time, and some stuff that happens costs money. Instead, you should be keeping some of that money easily available in a liquid, non-volatile form (which basically means a savings account without withdrawal penalties or a money market fund, not the stock market). How much depends on your necessary expenses; a buffer of three months' worth of expenses is an often recommended starting point for an emergency fund. The above should however help you evaluate how much to keep, how much to invest and how much to use to pay off loans early, respectively." Pay off the debt first.  Life circumstances change without notice, and starting any stage of life with a debt puts you at a disadvantage.  Luckily, your debt is small.  Please also consider accumulating a 6 month emergency fund before making investments. This will further protect you when life hands you a curveball.
I agree with the advice given, but I'll add another angle from which to look at it. It sounds like you are already viewing the money used to either pay off the loan early or invest in the market as an investment, which is great. You are wise to think about opportunity cost, but like others pointed out, you are overlooking the risk factor. The way I would look at this is: I could take a guaranteed 6.4% return by paying off the loan or a possible 7% return by investing the money.  If the risk pays off modestly, all you've done is earned 0.6%, with a huge debt still hanging over you. Personally, I would take the guaranteed 6.4% return by paying off the debt, then invest in the stock market. Now this is looking at the investment as a single, atomic pool of money.  But you can split it up a bit.  Let's say the amount of extra disposable income you want to invest with is $1,000/mo.  Then you could pay an extra $500/mo to your student loan and invest the other $500 in  the stock market, or do a 400/600 split, or whatever suits your risk tolerance. You mentioned multiple loans and 6.4% is the highest loan.  What I would do, based on what I value personally, is put every extra penny into paying off the 6.4% loan because that is high.  Once that is done, if the next loan is 4% of less, then split my income between paying extra to it and investing in the market. Remember, with each loan you pay off, the monthly income that previously went to it is now available, and can be used for the next loan or the other goals. "There is no equation. Only data that would help you come to the decision that's right for you.  Assuming the 401(k) is invested in a stock fund of one sort or another, the choice is nearly the same as if you had $5K cash to either invest or pay debt.  Since stock returns are not fixed, but are a random distribution that somewhat resembles a bell curve, median about 10%, standard deviation about 14%. It's the age old question of ""getting a guaranteed X% (paying the debt) or a shot at 8-10% or so in the market."" This come up frequently in the decision to pre-pay mortgages at 4-5% versus invest. Many people will take the guaranteed 4% return vs the risk that comes with the market. For your decision, the 401(k) loan, note that the loan is due if you separate from the company for whatever reason. This adds an additional layer of risk and another data point to the mix. For your exact numbers, the savings is barely $50. I'd probably not do it. If the cards were 18%, I'd lean toward the loan, but only if I knew I could raise the cash to pay it back to not default." See my recent answer to a similar question on prepaying a mortgage versus investing in IRA. The issue here is similar: you want to compare the relative rates of funding your retirement account versus paying down your debt. If you can invest at a better rate than you are paying on your debt, with similar risk, then you should invest. Otherwise, pay down your debt. The big difference with your situation is that you have a variable rate loan, so there's a significant risk that the rate on it will go up. If I was in your shoes, I would do the following: But that's me. If you're more debt-averse, you may decide to prepay that fixed rate loan too. "Place your savings into safe interest-bearing accounts. Take out the loans.  Keep constant track of your net worth. Having 100,000$ and 80,000$ in interest free debt is better than having 20,000$.  You can always convert money + debt into less money and less debt, but you cannot always convert less money and less debt into more money and more debt. Now, there are risks; that is why you want an interest-bearing account to place your savings in to offset the debt.  This minimizes the risk.  It also reduces the return. It is arguable that you should be at your most financially risky at a young age.  I'd argue that your future earnings are your by far largest asset at this point, and as a high school student going into college those future earnings have extremely high variability. Your financial situation is extremely unpredictable; being conservative about your high-leverage student-loan + education investments is probably justified.  The fact you can manage arbitrage here means you should; and if you are careful, you can eliminate risk and get almost risk-free profit from the maneuver. If your money is in less than perfectly safe accounts, you are now doing leveraged investing and magnifying the risk and return of said investments. If your money must be spent on college or you'll be financially punished, then you may want to consider pulling it out before the last possible legal point just in case something goes wrong. Apparently 529 plans may not treat ""paying off student loans"" as a valid way to spend the money.  You may need to talk to a lawyer or accountant about the legality of using these plans to pay off student loans, and the tax/penalties involved." "I agree with @Pete that you may be well-advised to pay off your loans first and go from there.  Even though you may not be ""required"" to make payments on your own loan based on your income, that debt will play a large factor in your borrowing ability until it is gone, which hinders your ability to move toward home ownership.   If you are in a fortunate enough position to totally pay off both your loan and hers from cash on hand then you should.  It would still leave you with more than $112,000 and no debt, which is a big priority and advantage for a young couple. Mind you, this doesn't keep you from starting an investment plan with some portion of the remaining funds (the advice to keep six months' income in the bank is very wise) through perhaps a mutual fund if you don't want to directly manage the investments yourself.  The advantage of mutual funds is the ability to choose the level of risk you're willing to take and let professionals manage how to achieve your goals for you.  You can always make adjustments to your funds as your circumstances change. Again, I'd emphasize ridding yourself of the student loan debt as the first move, then looking at how to invest the remainder." You almost never want to repay a pre-2012 student loan early. As you've realised, you can put the money in an ISA instead and earn more interest than you're paying on the loan. If you withdrew money from the ISA each month to replace the repayments being taken from your salary, there'd be money left in the ISA when you finished repaying the loan. This is also the cheapest debt you'll ever have, so if you repay it now and then end up borrowing money elsewhere in the future, you'll probably be worse off. In particular, if you expect to have a mortgage at some point, you'll probably be better off keeping the money to add to a deposit rather than repaying it now and then borrowing more on the mortgage. You should also consider how long it'll take you to repay the loan normally. If you don't expect to finish repaying within 25 years, you'd be throwing money away by repaying early. This is more of an issue for the larger post-2012 loans. You didn't mention how much is the interest rate of your debts. It is a very simple rule.  If you think you can make more money by investing (the best way you can) in spite of having debts then go ahead and invest.  Else, if you donno what you're doing and can't make sure you earn more than what you're paying off for interest then may be you should focus on clearing up the debts first. You can read more about similar topic discussion here Now, that you've presented the interest rate of your loans i.e. 11% which is your average, then I suggest you to clear up the high interest rate loans first i.e. which are above 11%  because it is very difficult to make an investment and get returns more than 11% of what you invest.  What ever be it, now that you won't be having big events in the coming 5 years, I suggest you to clear up all your loans and stay debt free i.e. tr to become stable and tension free. You know, because you can't run away anywhere with all those loans up on your shoulders, you HAVE to clear them today or tomorrow. So, now that you're free (in the next 5 yrs) and burden less, so why not clear them up today? I like the other answers.  But, here's one thing that concerns me that hasn't specifically been addressed yet: You mentioned your student loans are at low rates of interest.  Are those rates fixed or variable?  If those interest rates are variable, I would not count on rates remaining low indefinitely.  If you could imagine those rates going up by say 2% or 4% or more over time, would such rates make you change your mind about the debt and the pace at which you're paying it off? I would suggest that as the economy recovers over the next couple of years, the spectre of inflation will force the Fed to raise interest rates.  You don't want to be holding variable-rate debt when rates are rising.  For that reason, if your loan rate is variable, I would increase your payment amount so you can eliminate your debt sooner than later. Also – You mention in one of your comments that buying a home is 4+ years away.  That's not a long time, so I wouldn't commit the bulk of your savings to investing in the stock market, which can be temperamental over short periods of time.  You don't want to be in a large loss position just when it's time to buy your first home. However, it may be worth having some of your skin in the game, so to speak.  Personally, I would take a balanced approach: 1/3 debt repayment, 1/3 high interest cash savings, and 1/3 in some broad diversified index funds – and not all in the U.S.  Although, I also like the idea of getting some travel in while young, so perhaps 1/4 allocations to the money stuff, and 1/4 towards travel?  :-) Good luck. "I think you're right that from a pure ""expected future value"" perspective, it makes sense to pay this loan off as quickly as possible (including not taking the next year's loan). The new student loans with the higher interest rates have changed the balance enough that it's no longer automatically better to keep it going as long as possible. The crucial point in your case, which isn't true for many people, is that you will likely have to pay it off eventually anyway and so in terms of net costs over your lifetime you will do best by paying it off quickly. A few points to set against that, that you might want to consider: Not paying it off is a good hedge against your career not going as well as you expect, e.g. if the economy does badly, you have health problems, you take a career break for any reason. If that happens, you would end up not being forced to pay it off, so will end up gaining from not having done so voluntarily. The money you save in that case could be more valuable to you that the money you would lose if your career does go well. Not paying it off will increase your net cash earlier in life when you are more likely to need it, e.g. for a house deposit. Having more free cash could increase your options, making it possible to buy a house earlier in life. Or it could mean you have a higher deposit when you do buy, reducing the interest rate on the entire mortgage balance. The savings from that could end up being more than the 6% interest on the loan even though when you look at the loan in isolation it seems like a very bad rate." "If I understand correctly, your question boils down to this: ""I have $X to invest over 25 years, are guaranteed returns at a 0.6% lower rate better than what I expect to get from the stock market over the same period?"" Well, I believe the standard advice would go something like: Rational investors pay a premium to reduce risk/volatility. Or, put another way, guaranteed returns are more valuable than risky returns, all things equal. I don't know enough about student loans in America (I'm Australian). Here a student loan is very low interest and the minimum repayments scale with what you earn not what you owe, starting at $0 for a totally liveable wage - Here I'd say there's a case to just pay the minimum and invest extra money elsewhere. If yours is a private loan though, following the same rules as other loans, remember the organisation extending your loan has access to the stock market too! why would they extend a loan to you on worse terms than they would get by simply dumping money into an index fund? Is the organisation that extends student loans a charity or subsidised in some way? If not, someone has already built a business on the the analysis that returns at 6.4% (including defaults) beats the stock market at 7% in some way. What I would put back to you though, is that your question oversimplifies what is likely your more complex reality, and so answering your question directly doesn't help that much to make a persuasive case - It's too mathematical and sterile. Here are some things off the top of my head that your real personal circumstances might convince you to pay off your loan first, hit up Wall Street second:" "Welcome to Money.SE. Your question is similar to a number of others. The ""How do I pay my debt down?"" and ""How do I invest extra money?"" is a bit of a continuum since there's no consensus than one should pay off the last cent of debt before investing.  Oversimplify it for me: the correct order of investing offers a good look at this. You see, Pete's answer on your question is perfectly fine, but, since you make no mention of, say, a matched 401(k), I'd suggest that any answer to a question like yours should first take a step back and evaluate the bigger picture. A dollar for dollar matched 401(k) beats paying off even an 18% credit card.  Absent any tangents, any thought of investing, saving for anything else, etc, my answer is simple, line up the debt, highest interest rate to lowest. Keep in mind the post-tax rate, i.e. a 6% student loan you can deduct, is an effective 4.5% if you are in the 25% bracket." Regardless. It’s a guaranteed 5.x%. Reducing student loans also allows you other benefits; i.e. reduces your credit risk allowing you to pull out more credit at a cheaper rate in the future etc. Unless you strongly believe in current bull market continuing.. (there is a high overvaluation from market principles atm and it has been the longest rise in history), you should go for the guaranteed change. Additionally, if your loan is pegged to variable interest rates such as the fed funds rate, be cognizant that the fed will probably continue rising rates for the near future of good times continue, meaning your rates will go up while markets go down. Long story short, would recommend paying down debt unless you’re quite confident in your skills.  Edit: quick note that if you can do both, this is the best option. This is more an /r/personalfinance question, but I'll give my 2 cents. No matter what, the fund you invest in is going to be subject to risk, so you could end up losing money. It would definitely be a gamble.   If you have other debt at higher APR than the loan, it could be beneficial to pay that off using extra loan proceeds. First, let me fill in the gaps on your situation, based on the numbers you've given so far. I estimate that your student loan balance (principal) is $21,600. With the variable rate loan option that you've presented, the maximum interest rate you could be charged would be 11.5%, which would bring your monthly payment up to that $382 number you gave in the comments. Your thoughts are correct about the advantage to paying this loan off sooner.  If you are planning on paying off this loan sooner, the interest rate on the variable rate loan has less opportunity to climb. One thing to be cautious of with the comparison, though: The $1200 difference between the two options is only valid if your rate does not increase.  If the rate does increase, of course, the difference would be less, or it could even go the other way.  So keep in mind that the $1200 savings is only a theoretical maximum; you won't actually see that much savings with the variable rate option. Before making a decision, you need to find out more about the terms of this variable rate loan: How often can your rate go up? What is the loan rate based on? I'm not as familiar with student loan variable rate loans, but there are other variable rate loans I am familiar with: With a typical adjustable rate home mortgage, the rate is locked for a certain number of years (perhaps 5 years).  After that, the bank might be allowed to raise the rate once every period of months (perhaps once every year).  There will be a limit to how much the rate can rise on each increase (perhaps 1.0%), and there will be a maximum rate that could be charged over the life of the loan (perhaps 12%). The interest rate on your mortgage can adjust up, inside of those parameters.  (The actual formula used to adjust will be found in the fine print of your mortgage contract.)  However, the bank knows that if they let your rate get too high above the current market rates, you will refinance to a different bank.  So the mortgage is typically structured so that it will raise your rate somewhat, but it won't usually get too far above the market rate.  If you knew ahead of time that you would have the house paid off in 5 years, or that you would be selling the house before the 5 years is over, you could confidently take the adjustable rate mortgage. Credit cards, on the other hand, also typically have variable rates.  These rates can change every month, but they are usually calculated on some formula determined ahead of time.  For example, on my credit card, the interest rate is the published Prime Rate plus 13.65%.  On my last statement, it said the rate was 17.15%.  (Of course, because I pay my balance in full each month, I don't pay any interest.  The rate could go up to 50%, for all I care.) As I said, I don't know what determines the rate on your variable rate student loan option, and I don't know what the limits are.  If it climbs up to 11.5%, that is obviously ridiculously high.  I recommend that you try to pay off this student loan as soon as you possibly can; however, if you are not planning on paying off this student loan early, you need to try to determine how likely the rate is to climb if you want to pick the variable rate option. Pay off the Highest interest loan rate first. You must be doing something funky with how long your terms are... If you give a bit more info about your loan's such as the term and how much extra you have right now to spend it could be explained in detail why that would be the better choice using your numbers. You have to make sure when you are analyzing your different loan options that you make sure you are comparing apples to apples. IE make sure that you are either comparing the present value, future value or amortization payments...  EDIT: using some of your numbers lets say you have 5000 dollars in your pocket you have 3 options. excel makes these calculations easier... Do nothing: in 80 months your Student Loan will be payed in full and you will have 54676.08 owing on your mortgage and 5000 in your pocket(assuming no bank interest)  for mortgage: Pay off Student loan and allocate Student loans amortization to Mortgage: in 80 months you will have $47,910.65 owing on mortgage and student loan will be paid in full For mortgage: Pay 5000 on Mortgage: in 80 months student loan will be paid in full and you will have $48,204.92 owing on mortgage For mortgage: