A Borrower’s Guide to Repaying Student Loans and Investing

by Repayable | Feb 5, 2018 | #Millenniallife, Money Matters

Read this if you can’t seem to get a straight answer out of anyone when it comes to tackling your student loan debt and investing. Estimated read time 7 min.

What’s the dilemma?

Everyone knows they’re supposed to invest and save for their future. Over time investments provide a rate of return that compounds on itself year after year and will continue to grow even if you stop making contributions. Investing makes your money work for you.

The best investment strategy involves having enough money invested that you can live the lifestyle you want off the compounding interest indefinitely. Yep that’s right, you can invest enough money that you can withdraw money each month without actually losing anything from your originally invested amount.

Indefinite compounding interest sounds awesome and all but what are borrowers to do when we have mountains of student loan debt holding us back from financial freedom?

How can we pay for our current existence without robbing our future?

Let’s focus on retirement.

We probably can’t all agree on the degree to which you’ve got to “live your life now” or “save for a rainy day” . However I think many of us can agree that we don’t want to be forced to work forever because we can’t afford to stop working. To prevent that difficult future, we’re going to focus on investing for retirement.There are two general types of retirement accounts.

Employer sponsored accounts, 401(k) and 403(b)  are accounts where your contributions are matched by an employer. The contributions of the employer often take time to fully “vest”. That means if you were to leave your employer you would leave some or all of the employer contributions behind depending on the vesting strategy.

IRA’s are accounts that don’t have an employer match. IRA’s also have significantly lower contribution limits, $5,500 a year if you’re under 50.

Don’t leave money on the table.

The most straightforward approach to saving for retirement while repaying your student loans is to pick a strategy that gives you the most free money. That means if you have access to an employer-sponsored retirement plan you should contribute enough to get the maximum match.

For my 401(k) that means I contribute 5% of my income to get a 4% match from my employer. If I contribute anything less than that I’m leaving money on the table and if I contribute more I’m relying only on the market rate of return to see growth.

Know your goals.

Ok so you contribute enough to get the max match from your employer but you still have extra money after these contributions are made. Now what? Should you apply that income to paying down your debt more quickly to save interest or should you invest that money in retirement?

Common wisdom says this If your student loan interest rate is below the rate of return of the market (6-7%) invest the extra money instead of putting it toward student loan debt. I think common wisdom is wrong. Next week’s post is going to take a deep dive into how you can actually calculate the impact this choice has on your net worth. There’s also going to be a worksheet you can plug your own financial information into so you can objectively end your personal debate once and for all!

Knowing your goals is more about deciding what you want for your finances. Does your student loan debt give you a sense of fear or restriction? Does it keep you in a job you hate? If it does then perhaps for quality of life you’re better off eliminating that debt as quickly as possible.

Some folks aren’t stressed out by their debt and want to start putting their money to work as quickly as possible. If that’s you then perhaps you are better served by investing your extra income and taking a longer approach to student loan repayment.

Strategies for either approach.

If you want to get out of debt quickly. You should contribute enough to your 401(k) or 403(b) to get the full match from your employer and then put all extra income toward your student loan debt. Once you’re out of student loan debt, shift your mindset and contribute the same amount toward your retirement accounts.

If you want to maximize your investing. You should contribute all your extra money to your retirement accounts. Depending on your income level and the type of accounts you have you may want to max out the 401(k) before contributing to the IRA or the reverse may be true. Either way make sure to get the full amount of your employer match.

Once you’ve maxed out retirement account contributions. That’s $33,500 annually for most borrowers. You’ll need to find additional options for investing such as a brokerage account. There are many options but one company I like is Ellevest which strives to close the gender investing gap. Yes we not only make less than men but we also earn less from investing in our lifetimes too! Ellevest is a robo-advisor that matches you with a portfolio that suits your financial goals and can re-balance your portfolio when needed. They also send alerts when you’re off track to achieve your goal and advice with how to get back on track.

What do you think?

What’s your approach to repaying your student loans and investing? Do you want to pay off quickly and minimally invest or do you want to maximally invest and take your time to repay your loans? Let me know in the comments below or on the Repayable Facebook Page!