Invest or pay down student loans

21 Replies

Hello BP, I just graduated with almost 85k in student loan debt. This is between my fiancée and I. Our household generates 95k in W2 income. Now that I have money coming in I’m not sure what is the best thing I should be doing with it. Should I be paying down student loans then flood my investments when they are gone or should I go for a balanced approach? I have a 403B and Roth IRA account for options and I own a house that I live in and intend to rent. What would be your strategy?

@Alec McGinn Great question. I am sure many other graduates are in the same situation and are looking for an answer.  At a high level all you need to consider is what interest rate your student loans are at, and what type of return can you get with real estate. If you can achieve a return higher from real estate than your student loan interest, then you are making money.

If your ROI from real estate is higher than student loan interest, then you can appreciate these perks as you develop your technical knowledge. 1. You are learning the business 2. Networking, 3. Building equity, 4. Have the opportunity to take advantage of the tax breaks that come with real estate.

In my opinion you should find a balance of paying down student loans and investing in real estate as you are comfortable with. I would not recommend paying down only student loans as you may fall into the cycle of thinking that you will learn more about real estate when all the student loans are gone. Which could be 2+ years from now, and who knows if you will still have the energy or motivation to get involved in this business. If you can save money for an RE investment, you can get over the biggest hurdle (buying your first investment property), and focus on refining your systems to make even more progress on the next deal. Good luck 

@Alec McGinn

You've gotten great perspective from @Michael Pearse . Depending on the route you choose, you may benefit from investing the Roth IRA in real estate based investments, such as tax liens, private lending, or notes. This would allow you to leverage the tax and savings benefits of the account within the real estate space.

One thing I might add to what @Michael Pearse said is that if you have a portfolio of student loans (totaling the $85k of debt) as we did when my wife attended Pharmacy school you should review each loan individually. Each may have different unique payment terms and interest rates. Then determine if it makes sense to pay down the loans with the highest rates first and follow the strategy Michael outlined.   

Whatever you do, only pay on your loans until you are married.  There is no 'we' yet.

If you end up splitting, you'll have no legal recourse to retrieve anything you paid.

Are all the loans federal Sallie Mae?  I'd focus first on private loans if I had those.

Hi @Alec McGinn ,

I agree with the general advice of comparing your projected cash on cash return of investing versus the interest rate you are paying on your debt.  Generally the cash on cash return of investing will be higher, but it does depend on the deal.

There are a few other factors to consider.  1) Would a bank find you more appealing to loan to if you pay down more of your student debt?  If paying down some of your debt now does make you more appealing, then you may qualify for better loans (i.e. higher amounts, possibly with better terms).  That might mean that you could eventually (in a year or two) be able to invest in properties with an even better cash on cash return.  2) What do you think about the market in the area that you are about to invest in?  Do you think prices are at their peak, is there still room to grow, or is your market fairly stable?  I generally don't advise trying to time the market, but at the same time I never ignore the first rule of investing "Buy Low, Sell High".

@Alec McGinn I also have plans and I decided to lower my payment as much as possible. The interest rate isn’t terrible. I’m saving aggressively to invest in rentals because I believe the ROI is huge if done right. Especially when you consider the cash flow, appreciation, loan pay down and tax benefits.

Updated almost 3 years ago

*I also have loans*

@Alec McGinn . I would live like a broke college student even though you now have a good income. Put every dollar that you can with your fiancée to pay off both of your loans. If she is not contributing financially to the household I would only pay off your loans until you get married in case you end up breaking up. Once both of your loans are paid off, focus on saving up the down payment for investment properties.
@Brian Schmelzlen I live in a booming city with a shortage on housing. I have one private loan that amounts to 11,500$ that i especially want to pay off and then the rest of the loans between the two of us are all federal loans. Most of her loans were subsidized. This along with saving for our wedding is putting a damper on my investing for the time being. Should I contribute more to my Roth IRA or 403b for lowering my taxable income for the time being? Having options is a good problem to have!

I'd focus on getting through the wedding. You may have debt from the wedding to pay down (let's hope not), and there's no point in discussing her loan pay down until after the wedding anyway. I agree with living off beans and rice for a while until you figure it all out. You can do both, invest and pay down loans, but it largely depends on how good you are at living below your means.

@Alec McGinn student loans are typically at a pretty good rate so it doesn’t make a lot of sense to spend years that you could be compounding $ trying to pay it off. do both. one thing you should NEVER do is defer payment. know too many folks who have tried that and have been burned.

Um do both. At 96k you should be able to make the payment on your loans and save for down payments. as soon as I graduated I got a duplex and started house hacking. My duplex covers the mortgage and my student loan payment. I skipped the Roth IRA because I want to enjoy life now and in the future. I do contribute the minimum to my 401k to get the match. I do eat out a lot but I have no car payments or any other consumer debt. So all in all I live pretty comfortably while saving for my next multi family and paying student loans.

No way should you be buying RE at this point. You don't have the financial position at this point to make it work out well for you, and way too many other good options for investment if that's what you'd rather do than pay off a loan. You have NO IDEA what your RE ROI will be - and I guarantee it will be a lot worse for you than you think - maybe negative.

If you have a 401k-type option, put the max into that and a Roth as well. Any other money left over should go toward your student loan. That'll keep you busy for at least a few years. Then you can buy a house to live in.

Do not pay down your fiance's loans or otherwise co-mingle any finances. Do not buy a house together. Then do the opposite once you're married and combine it all.

I still owe around $8K in student loans that I've been paying just over the minimum monthly on auto-pay since 2012. Those loans are at like 4%, I invested in real estate instead and have averaged over 20% ROI. If I had paid off the loans first, I would have been several years behind. Now, I'm semi-retired at age 40 between my real estate portfolio and other business interests and I still pay just over the minimum for the same reason. As others have said, if the rates are lower then you can earn, invest the money.

@Michael D. Too late man I already own a house with her and I’m not too concerned with the pessimistic outlook. I could rent my house in a month with 200$ cash flow no problem factoring in vacancy and repairs. If things were to fall apart now they could just as easily fall apart after we are married and then we would be having the alimony conversation lol!

First, I would consolidate your loans to a lower interest rate with DRB, So-Fi, etc. This will automatically save you thousands. 

I would then contribute to your Roth IRA and 403B up until the maximum you are comfortable. Then I would throw everything else at the student loans.

Clearing student debt creates a feeling that has a high ROI. It will leave you with options and you'll be more willing to take on risks without the worry of the debt.

I invested first and then paid off my student loans. The extra cash flow from the rental helped pay down the loans and I would personally take that approach again.

Since you are engaged and are saving for the day, it makes sense to simultaneously pay down loans with the highest interest rates first or you can use the snowball debt reduction method.

@Alec McGinn Hello Alec, I’m not a financial expert by any means, so take what I say with a grain of salt, but I am in a very similar position as you. I have about 25k combined student loans as my wife. I’ve gone back and forth on the same question and have decided to first attack our loans through some wholesale deals that I’m gearing up hopefully get. once we have zero debt (other than a mortgage), then we will start pooling money for rentals/flips. To me it’s just the best way to maximize cash flow. On that 25k debt we are paying $320 a month, so unless we can find deals that will net us more than $320/month for a 25k investment, Its just not worth it.

@Alec McGinn my personal strategy would be live like a student until we got pregnant. That means housemates cheap beer and rice/beans. 4% interest on your student loans is cheap money. I would pay the minimum until my fiancee/wife got a job and pushed our house hold income over the $160k cap for tax deductions. I would also look into the equity on my home and go for a HELOC. I would potentially use the HELOC to buy another property OR I would use it to pay off the student loan once our HH income no longer allowed me to take a deduction.

Hello and welcome to this site Alec!  Your question was answered well by Michael Pearse.  In other words, if you can pay the minimum on your student loan and make an investment debt payment and make both payments and still make money above them, that is called a good debt.  Good debt is the kind of debt you want.  Do not be afraid of good debt.

Good luck to you!