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Should You Use Extra Money to Pay Off Student Loan Debt or Invest?

Should You Use Extra Money to Pay Off Student Loan Debt or Invest?

If you end up with a little extra money in your bank account – from a tax refund, a bonus, or from living below your means – you may wonder what you should do with this cash. Should you put it toward your student loan or invest it?

This decision depends on several factors, like your interest rates, tax rate and personal preference. Let’s break this down with a general rule you can use as well as some things you’ll want to consider when making this decision for yourself.

A General Rule of Thumb

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  1. The after-tax interest rate you’re paying on your student loans, and
  2. The after-tax return you expect from your investments

If you expect to earn more on your investments than you’re paying in interest on your student loans, you’d put the extra money toward investing.

For example, say your student loan has a 7% interest rate. You currently pay $1,000 per year in interest and make $60,000 per year, which puts you in the 22% income tax bracket. Because you can deduct the amount of student loan interest you pay on your income tax return, up to $2,500 per year, the after-tax interest rate you’re paying on your student loan is 5.46%.

You can calculate that by multiplying the interest rate on your debt by (1 your ple, it’s 7% x (1 22%) = 5.46%.

Once you know the after-tax rate you’re paying on your student loan debt, you need to find the after-tax return on your investments so you can compare the two. (more…)

Posted on March 22, 2022

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