Should you pay off student loans or invest? It’s one of the most common financial questions for people early in their careers, and it often gets framed as an either-or decision. In reality, the answer depends less on picking a side and more on understanding a few key numbers.
It Comes Down to Interest Rate
The answer depends on your interest rate. If your student loan rate is higher than the return you reasonably expect from investing, paying down that debt may be the better first move. A guaranteed savings on interest, especially on a high-rate loan, can be hard to beat with market returns that are never guaranteed and can fluctuate significantly year to year.
On the other hand, a lower-rate student loan may not need to be the priority, especially if it’s leaving other financial opportunities on the table in the meantime.
Don’t Skip the 401(k) Match
But before anything else, make sure you’re capturing your employer’s 401(k) match. That’s one of the few guaranteed returns available, often equivalent to an immediate 50% or 100% return on whatever is contributed, depending on the plan. Paying extra toward student loans while leaving a full employer match unclaimed usually means passing up free money that would otherwise more than offset the interest being saved.
It’s About the Order, Not the Choice
The right strategy is not choosing one or the other. It’s understanding the order that helps you make the most progress toward your goals. Capturing the match, evaluating the loan’s interest rate against realistic investment returns, and building in some balance between debt paydown and investing all play a role in getting the sequence right.
Where does your student loan rate stand compared to what you’re aiming to earn by investing? Want help understanding your options? Contact us today to schedule a complimentary Q&A with one of our team members.
