Is it better to pay down student loan debt or put some of the payments into savings or the stockmarket?

Question

I have about 43k in student loans, one loan is 8.75% and the other is 5.34%. I figure I have about $750 a month I can either put towards the loans. My question is should I put all of that towards the loan, or put some of it in savings?

Answer 1

You ask one of those questions that is actually a "close call". In general you let the interest rates dictate.

8.75%, 5.34% or X% for your other options. To answer, we need to know the other options...

Savings account: 4% - NO, put your extra cash to the higher interest rates.

Stock market - 10% - YES, put your extra cash into securities.

The only real question then is WILL the stock market actually pay more than the 8.75% loan rate? That is a tough call in the short-term. Overall, yes, it will, but in the time that you will have the loan, will it? I'd say this is so close to call, that I'd rather see you knock off the 8.75% student loan.

When that is done, we have the 5.34% and that rate seems low enough that the securities/mutual fund/stock market options become your better choice at that time.

Oh, and could I add...don't be tempted to split things up - like $400 to debt pay off and $350 to investment. Always put your money towards the thing with the highest interest rate (good or bad thing). The only question is whether the rates you are using to guide you are predictable enough...in close calls, then choose eliminating debt before risking a stock market investment.

Good luck.

Answer 2

I would pay the standard payment on the 5.34% loan. If you do not have 6 months of expenses in savings, you should be increasing your savings. If you have less than 3 months I would put all extra money in savings. Once you reach that point I would put 375 toward savings and 375 in an extra payment on the 8.75% loan.

If you are eligible for a 401k with a company match, you should be contributing to that to get the match even if it lowers the amount available for increasing savings and paying off your loans.

Answer 3

In my opinion it is ALWAYS better to do half and half......what if an emergency happens? For 8.75% loan I would pay at least 1/3 more than my minimum payment. For the 5.34% pay minimum payment or at least a quarter more. As far as accounts go, get a regular savings account put a legitimate amount in that account, than work with a good bank preferably Wachovia Securities and get some mutual funds (sooo much better than stocks especially if you owe loans it's much safer at this point). You might want to get a checking account but make sure you don't get a debit card for it or a card with a Visa/Mastercard logo on it cause you will only spend it all by taking money out of ATM's and paying a whole bunch of processing fees or swiping it at all stores; simply throwing your money away. If you do decide to open a checking account or have direct deposit (and get a card). DO NOT GET ONE WITH A VISA/MASTERCARD LOGO ON IT and DO ONLY RETRIEVE MONEY FROM YOUR BANK OR THEIR ATM!!! GOOD LUCK!

Answer 4

I might do a little of both.

Perhaps you should accelerate payments on the 8.75% loan, but I'd leave that 5.34% one alone (make normal payment) in addition I'd put some money in good investments (stock mutual funds, etc.).