Paying off student loan vs investing in stock market (pay, taxes, rate)
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I have tons of student loans (~200k). Most of the loans have APR in the range of 5-6%. Would it better to use income to pay off the student loans extra each month vs. investing in the stock market (my gain ~7% in 6 months)?
I have tons of student loans (~200k). Most of the loans have APR in the range of 5-6%. Would it better to use income to pay off the student loans extra each month vs. investing in the stock market (my gain ~7% in 6 months)?
You won't be able to maintain that kind of return over the long haul. There's only one Warren Buffett.
The rest of us would be well-served to look at the long-term return of the overall market. You *might* beat it by being patient and/or following sound advice. You might not. The returns of the average investor, which is what you probably are, suggests you will not beat it significantly.
You *will* get an immediate effective 5-6% return by paying off the student loans, and better: have the peace of mind of having retired your debt.
By the numbers, you're probably better off investing-barely. But you don't get the peace of mind. You get fabulous highs and soul-crushing lows, and you might quit during the lows.
You won't be able to maintain that kind of return over the long haul. There's only one Warren Buffett.
The rest of us would be well-served to look at the long-term return of the overall market. You *might* beat it by being patient and/or following sound advice. You might not. The returns of the average investor, which is what you probably are, suggests you will not.
You *will* get an immediate effective 5-6% return by paying off the student loans.
There may be only one Warren but Carl has smashed him fwiw
Or put it into 401k to protect it from debt collectors and bankruptcy. Then get on a plan to get the debt forgiven, and in 10 years you have a nice 401k and no debt
I have tons of student loans (~200k). Most of the loans have APR in the range of 5-6%. Would it better to use income to pay off the student loans extra each month vs. investing in the stock market (my gain ~7% in 6 months)?
Short term gain is not what you should be concerned with unless you'd be able to pay the loan off in 6 months ($700k+ income or inheritance?) and even then it's the leading 6-month return, which is future and unknowable, that would matter, NOT the trailing 6-month return. So your 6-month gain is really not what you should use to make a decision of this sort.
Also, apart from what you put in retirement accounts, your investments are taxable while your loan is not deductible (or if it is, your income is low enough that you need to get out of the loan anyway just to have breathing room in your budget!!). Thus, even with a 7% return and a 6% interest rate, once taxes enter the picture, you might be better off just paying off the loan than trying to beat the interest rate in the stock market.
Most importantly, you are not considering the element of risk. This is especially problematic when you are relying on volatile assets to offset a non-bankruptable debt. Another economic recession is not out of the question, and having an income reduction and a loss of portfolio value would be a double whammy that you might not be able to afford.
For these reasons, I think that after making any employer-matched retirement contributions and funding a 3-6 month emergency fund, extra money should go towards the loans, not into the stock market.
Just curious...what degree did you earn that cost you $200K? (Please don't tell me something like "art appreciation")
Hopefully MD
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