Investing vs. Aggressively Paying Down My Loans?
If you are like most students graduating from PT school, you will come out of school with student loans. In addition to graduating with student loans, you will graduate with questions. LOTS of questions. One of them being, how quickly should I be trying to pay these off? While everyone’s situation is different, there are several things to consider that are pretty universal.
What Is Your Risk Tolerance and Comfort With Debt?
Most of us will have five and even six figure student loan debt. Some maybe even exceeding over $200k. This will not go away overnight no matter how aggressively you go after them or how lucratively paying your first job is. The reason I bring this up is because you are going to have to do other things financially while paying off loans. Saving for short/long term goals, retirement planning, down payment for a house, wedding planning, starting a family and various other personal or financial investment opportunities and desires. The beauty of paying down a loan is that you get an immediate return on your money. Whatever you pay towards your loan, you are immediately saving in future interest payments on that loan. However, some investment opportunities may present that can yield returns greater than the interest rate on your student loans. Mathematically, it would be wise to choose the investment as it will net a better return for your money. However, all investments carry risk and you need to make sure the level of risk measures up with your level of risk tolerance.
What Are The Terms and Rates Of Your Loan?
It is difficult to assess the benefits of investing versus paying down debt if you don’t even know the terms of your loan. Familiarize yourself with the details of your loan regarding the term length, the APR, amortization schedule and other details. If these terms look unfamiliar to you, I have explained it in my Course
There are no clear cut rules as to what interest rates are deemed good versus bad, but appreciate that the lower rate, the better the deal. Conversely, the higher the rate, the harder it is for you to chip away at the principal balance as more of your money goes towards satisfying interest payments. With the current state of the economy, some regulars in the field are suggesting the following for loan interest rates:
0-3%: Satisfy monthly debt payments but utilize extra money to invest as you can traditionally find multiple ways to earn greater than 3% on a variety of investments. You can also look at this the opposite way if you are risk averse and say that this is a great way to allocate more money towards loans and pay down the principal balance faster if you are extremely debt averse.
4-5%: A balanced approach between investing and paying down debt is most likely appropriate and can justify skewing your extra money in either direction depending on your risk tolerance and preference.
6% and above: Contribute something to investments (for example, enough to receive a match from employer for 401k if provided), but focus all extra funds towards debt repayment. If you are very risk tolerant and want to try to earn higher than 6% with investments, feel free to, but appreciate your margin for error starts to decrease and you need to take a calculated approach.
Your Age, Career Opportunities and Earning Potential
If you are younger in your career and have lots of career opportunities ahead of you, then you can afford to take more chances and trial different approaches. For those later in their career or with limited earning potential then you may not have the flexibility to choose what you want to do, but rather what the numbers suggest as most appropriate.
Everyone’s individual situation will influence their decision and should match up with what their comfort level is, what the numbers pose as being realistic and what allows them to cover their personal goals. Those with Public Service Loan Forgiveness or other Income Based or Term Based Forgiveness plans will have different variables unique to their situation.
-Dr. Zach Baker, PT, DPT, SCS . Do you want to chat further? Engage and discuss with Zach on Instagram HERE!
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