Personal Finance

Should You Pay Down Student Debt or Start Investing?

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What’s smarter—to pay off your student debt first or to start investing in real estate first?

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One of the biggest dilemmas that my generation is facing is whether to tackle and pay off their student debt completely before investing or to work on increasing their income and net worth first.

It can be a tough choice. There are many different voices, columns, and books out there arguing for each option. This can be made even tougher due to the fact that many millennials are leaving school facing a job market with stagnant wages.

Why I Started Investing First

My personal choice was to leave college and start investing in real estate before making payments on my student loans. I wouldn’t change that decision at all, even if I could go back today. This strategy certainly worked out for me. I know it has worked out for plenty of others, as well.

Then, I see those who took the opposite approach. Many are still working on those student loan bills, still aren’t making the money they wanted, and surely aren’t enjoying the lives they dreamed of.

Man counting college savings fund, tuition fee or student loan with calculator. Education price and expenses concept. Money and papers on table. Calculating budget and planning finance.

Related: How to Be Smart About Credit Card Debt When You Have Student Loans

I think it’s backwards to pay your loans off as quickly as you can. You can be using that capital to put into investments that you can live off in the future—even for the rest of your life. Do you really want to work for the next five years or more to essentially just be a machine generating income and investment profit for banks, colleges, and the government? That sounds like a miserable life to me.

Yes, you should pay anything you borrowed back. There is no question about that. But there are massive advantages to investing first. The most obvious are the discounts on property. Real estate values have kept rising over the long-term since the beginning of recorded history. Less than 1 percent of individuals can really hope to save as fast as inflation. So if you don’t invest early, owning a home or rental property will keep getting further out of reach.

What Gives You the Best Returns?

In most cases, you can defer your student loan payments, too. That means putting your student loan payments on hold until you are making real money. Take advantage of that and invest so that you have the surplus to pay your student loan payments later.

invest-student-loans

Related: How to Use Real Estate Investments to Cover Student Loan Debt, Car Payments & More

The quick and easy test to decide what you should do first is to determine which choice gives you the best returns. For example, if you are paying 5 percent interest on your student loans but can reasonably expect 8 or 10 percent returns on a real estate investment, invest first. You can then both pay back the student loans and keep the change.

Plus, consider if you just plow everything you have into debt payments—what are you left with? Nothing. Absolutely nothing. If you invest first, you get to pay off your loans, and you may end up with a valuable asset and ongoing passive income for life.

What will you do?

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What do you think about this topic?

Let me know your thoughts with a comment!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded Sonder Investment Group, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to wholesaling and scaling a business.

    Andy Gross from Baltimore, Maryland
    Replied about 3 years ago
    I think there are some important caveats here, especially if you plan on doing real estate full time. First, if you are going to quit your job, you need to ask yourself how much you need each month to live. Every student loan payment you have raises the floor. Yes, you could defer, but IMHO, you’re just postponing your financial freedom. Second, are your loans variable to fixed rates? I wanted to pay off my variable rate loans as quickly as possible because low interest rates can’t last forever. I mean, we’re slowly finding out that maybe they can, but the conventional wisdom is that they have to come up at some point. Third, can you loans be forgiven because you work in public service, etc? If so, you might want to consider the lowest possible payment without deferring. While the game of interest rate arbitrage makes sense, student loans can be funny. When you buy a car at .9% interest, it doesn’t make sense to pay it off, but the equation gets a bit trickier when you are talking 5-6% interest rates on student loans.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Interesting points. By deferring the loans fresh out of school IMO that will allow for someone who doesn’t have all the responsibilities one would have later in life to now start the process of investing for their future. On the other-hand if someone decides to pay those loans right out of college and get them paid off in lets say late 30’s they have more responsibilities that will tie up capital(cars, kids, house etc.).
    Whitney Woolstenhulme Investor from South Jordan, Utah
    Replied about 3 years ago
    At my student debt peak I had 4 loans in my name. My largest loan was from a private lender that sat at around 10% variable. That loan was the bane of my existence, so I did everything in my power to get rid of it as soon as humanly possible. Yes, that meant that I had to delay my investing plans, and this was a tough decision for me. But I knew that I would lose money if I chose to invest rather than pay that thing off. After about 4 years of on-off dedication following a pay off plan, I blew that thing away (and two other loans) and am now left with one student loan. I’m not in such a rush to pay the remaining one off, though, since the interest rate is low-ish (5.6% fixed federal) and I know I can get higher returns through investing.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Great job on paying those loans off. Have you started the process of investing since paying those outstanding balances off, Whitney?
    Michael McCormack Real Estate Professional from Carlisle, MA
    Replied about 3 years ago
    Currently being a student, I plan on investing in real estate while paying off debts at the same time. This might be a bit tricky to pull off, but my plan is to invest in real estate part time while working a technical 9-5 job for the first few years after finishing my masters. I’m getting my masters in a highly technical field which is currently in demand by employers, so my thought process is to attain a high paying job within 6 months after graduating, and hopefully purchase my first 4-plex to house hack a few months after starting the job and then increase the amount rentals at a rather aggressive rate. Of course this is all contingent upon getting a 6 figure salary to begin with, but since I will have a Masters degree in machine learning from a good school, after completing 2 summer internships at companies in the top of that field, I am confident that I will be able to find a job that will allow me to both invest and pay off school debts.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Sounds like a solid business plan. Why not start now versus later, Michael?
    Peter Mckernan Residential Real Estate Agent from Newport Beach, California
    Replied about 3 years ago
    Hey Sterling, Great article and great topic that is at the forefront of everyone’s thoughts in this current state! I know that these two topics are hard to make a decision on, which is why as an individual there should be a choice and that choice should be made for the long road. I have listened to Dave Ramsey and also invested prior to listening to him. I do not have any school debt; however, will soon be married to my future wife that will have student debt from law school she just graduated from this past May. We will take the road to pay off the debt quickly, because come to realize that if there is a deferred payment plan for the loans, the interest rate is still generated as it sits there. That could be substantial on $100K or even a lot more on $200K. All that should be thought about is what makes sense for you goals and your family goals. Also, this depends on the earning power of you and your family. If the earring power is very high and that debt can be paid off over a year period verses a ten year period than that could sway your plan.
    PJ Muilenburg Rental Property Investor from Sapulpa, OK
    Replied about 3 years ago
    Of course each situation is unique but I paid off my 65k in student debt and then started investing. Interesting timescale for me to read this article now because it took me 3 years to pay off that 65k in debt and I have now been investing for 3 years. Which makes me an interesting case study. I am still glad I made the choice because real estate is a long play. Three years into it I am making headway now in real estate but the significant payoff comes later and I didn’t want to push the debt too far down the road. I feel like I put myself at a strong advantage with less debt. My interest rate on those loans was 6.8% and I know they offer better rates these days. I should also note that I paid 1/3 of my salary to get that paid off so quickly and if someone doesn’t have the fortitude to be aggressive with debt, they may end up delaying investing too long.
    NA Lewis from New York City, New York
    Replied about 3 years ago
    This is a great article that should definitely be expanded upon in detail (i.e. a detailed example as to what it could look like to invest in specific kinds of properties while paying off a student loan). A lot of articles out there tell you why you should be paying off your student loans and other debt first (they’re not entirely wrong), but at the end of the day, it all comes down to the numbers and your goal. I started looking into what real estate could do for me about 2 years ago, and I have about $40k in student loan debt – a far cry from what other people have experienced. I went through a rough patch and a small amount of interest accrued which became daunting when you spend most of your time trying to pay off, but I’m tired of thwarting my investing goals to try and pay off student loans; I’d never start if I’d keep telling myself that story.
    Laura H. Investor from Peculiar, Missouri
    Replied about 3 years ago
    “In most cases, you can defer your student loan payments, too. That means putting your student loan payments on hold until you are making real money.” This can backfire… If interest is accruing while your loans are deferred, you can end up owing a LOT more than what you originally took out. Might it be a better strategy to review re-payment options? Sometimes you can pay a smaller amount for a few years (2-5) and then have the payment bumped up after you’ve “established” yourself.
    Mike Flatow from Maitland, Florida
    Replied about 3 years ago
    I love this post because I’m always considering the type of debt people are carrying. Especially young people. Back in the 80’s I had a drop out friend who actually took his student loans and made downpayments on lots near a university, built on the cheap (his dad was a contractor), flipped them and did it a second time. He never finished college lol. But, student loans are supposed to be cheap debt. I’m not sure the rates right now but that was supposed to be the idea so it depends on your returns and aversion to risk. The loans will keep but investments need time to grow. I like the idea that student loans are not attached to the properties you buy.
    Tiara Joseph
    Replied almost 2 years ago
    This is a very common yet an important question for the young adults who are entering the workforce. I think the entire decision depends on the two factors. One is the rate of after-tax-interest which you are paying on your debt and another is after-tax rate of return which you expect to earn on your investment. In my opinion, if the second one is greater than the first one, then go for investment or else pay off your debt.
    Steven Morris from Dayton, OH
    Replied over 1 year ago
    If you plan on getting a job and having a W-2, a revolving student loan is actually good for your credit. I would think its this balance of getting your credit score up over time and saving for real estate investments that would work. My student loan I have been paying the minimum on for the last 6 years. It has done wonders for my credit.
    Account Closed from Madison, Maine
    Replied over 1 year ago
    I recently found myself in a rather heated and one sided debate over this on a post I made in here, glad to see others with my point of view. Not only does it free up money for REI, help your credit, but I also saved almost $5,000 in taxes this year because of my school loans, turning that 5% into less than 2%. Great article!
    Jonathan Dunn from Tampa, Florida
    Replied over 1 year ago
    Interesting post. I can see the benefits of both approaches. I’m an anesthesiologist with a stable income. I am two years out of residency. A 40k student loan sounds amazing right now. Unfortunately, mine was $350,000 with an additional $150,000 in personal loans that my family accrued throughout undergrad, medical school, and residency (12-year process). I have aggressively paid off $250,000 in debt within the last two years. However, I do believe that it is important to focus on acquiring passive income as soon as possible. It doesn’t make sense to grind for five years and have nothing to show for it but a paid off student loan. My student loans are floating around 6.8% right now. My plan is to decrease the loan balance down to $150k and then refinance with a lower fixed interest rate through a credit union. However, by then I will have acquired several rental properties and benefitted from tax savings through my LLC, passive income used to accelerate debt paydown, etc. Thanks for the article and posts. It’s good to see different approaches. We all have different backgrounds and debt burdens, but the same broad goals. If anyone is in the Tampa, FL area and is seeking a real estate partner for SFH, Duplex, Tri’s, etc. PM me. All the best BP team!
    Jessie Chidi from Saskatoon, SK
    Replied 2 months ago
    This is a great article but the question for rookies like us is how do we get started? I don’t mind putting off my loans till i can repay them probably all at once, with a mindset if investing in real estate, the question however is how do I begin?
    Sara S. Rental Property Investor from Des Moines, IA
    Replied 2 months ago
    So I drank the Dave Ramsey kool-aid back in 2013 after graduating college and I regret it every day. Hindsight is 20/20 but I agree with your conclusion so much. Once you pay it off, you have nothing. I missed out on so much of the economic gains from 2014-2019. Friends who purchased homes right away have $100,000 or more of equity in them now from their increase in values while J rented.. I missed out on all the stock market gains as my former company didn’t have a match so I didn’t contribute to it at all in favor of paying off the debt. I’m still in debt repayment with about $100k left.. I scraped enough to buy a townhouse in 2016 and turned into a rental in 2018 to help pay off the debt smarter but now I’m holding onto the property for as long as I can and the student loans will get paid off when they reach their term. I refi’d them to 4% fixed 15 yr loan and am letting them ride now so I can contribute the max 401k limit.. which will probably tank now that I’m finally in the game. But oh well. I feel more on track now than ever.
    Josh Vines from Fayetteville, AR
    Replied 2 months ago
    Great article and points made for investing first. I also believe it primarily depends on your student loan balance, interest rate, and your payoff period. I agree that there is potential to make a better return on real estate investing as what you are paying in student loan interest, but if you have a relatively low loan balance and can pay it off fairly quickly, then it may be beneficial to go ahead and knock out the debt before jumping into investing. This is of course varies by everyone's unique situation. My wife and I are doing both simultaneously. We bought and are house hacking a duplex while paying off her student loans. We plan to pay off the loans while also gaining experience through our first real estate deal. Loans should be paid off by Spring, and then we will shift our focus on investing.
    Kevin Smith
    Replied 2 months ago
    Does anyone take stress and monthly minimum debt payments into account? It was an easy choice for me, pay off student loans first.