Should I Pay Off My Student Loans or Save

To Save or To Spend?

Many of us think that taking up a student loan and paying it in due time would be easy. We think that the education we get will, ultimately, give us the rich lifestyle we see in the movies. But those things very seldom happen with taxes, inflation and expenses associated with our usual ways of living.

We are eventually faced with the dilemma: Should I pay off my student loan early for my rich-and-abundant future? Or to spend on the loans now so the future will be a lot less of a burden. Even after graduation, we expect that life would get a little bit more challenging – or a lot too-hard-to-handle.
 
Students are presumed to have three options: pay off the loans now and save for retirement later; save for retirement now and make the minimum loan payment required; and a combination of both.

Reviewing the Options

If students were to pay off all their loans before retirement, they would not even have enough to save for retirement. Many students see that student loans are a temporary setback and would want them ‘erased’ and out of their lives. This is untrue.

However, it makes a whole lot of sense trying to pay off student loans and save for retirement later if the charging interest is greater than 8%. If you benchmark this finding to the 8% investment return on the stock market, it is a lot wiser to pay more in interest than earning on investments. The money will be more wisely spent on high-interest loans and investing sooner but not later. With multiple loans with variable interest rates, it is prudent to pay loans greater than 8% and set aside the excess for retirement.

The second option should only be considered if the interest rate on the loan and the investment return is less than 8%. The money would be best allotted or used in retirement than in paying off loans. Also, this is a much stronger case if you consider the accumulated benefits of retirement plans as compared to the minimum loan payment. If you think that this option is reasonable, then this option is for you.

The last option strikes a compromise between the two. If the student loan has a 6% to 8% interest rate, then you could strike that compromise.

To conclude, student loans are very dynamic and flexible according to your needs. If you plan to finish the payment of your loan as quickly as you could with very minimal to no investment, opt for the first option. If you want to have a good retirement in the future but carry the burden of the loan much longer, opt for option two. Option three strikes the balance of the two but without much efficiency.

As we can see, the decision is focused on the interest rate, the investment return on stocks, and your ability and willingness to pay. As a rule of thumb, think of it this way: the lower the interest, better pay the minimum monthly payment and invest the rest of the payment. Consider these first before getting a student loan and consider how you manage your finances.