investment/debt question

[Marlow]

Hi. I have some extra money. Is it better to pay off my school loans (~$4.5 apr) or invest it where I can expect around 10% on my money?

I know the answer seems obvious, but I'm in a siutation where my household income is going to decline a little in about 2 years. At that point, it would be great to have fewer bills. If I invest the money and pay my debts through that investment account, then I have to pay taxes on the interest, and my money is at risk (albeit a small one).

Also, if you advocate for investment, please let me know if there is EVER a situation that it would be better to pay down the debt.

Sorry in advance if this is the wrong forum.

Thanks,
Marlow

[cwsiggy]

10% on your money with little risk?

Can everyone here please have the name of that investment???

On a serious note, most people say that school loans are the cheapest money around so don't worry about paying them down so fast. If you can get 10% even with some risk, you are way ahead even after taxes. I'm pretty sure you can write of the interest from school loans from your taxes, so it is close to a wash on your income from the invetment.

[phil_ivey_fan]

are your school loans subsidized or not?

[MrTrik]

Invest the money. When your income drops decide whether to pay down the debt with invested money and gains. If income drop is due to something fairly normal, like a two income family dropping to one, or loss of a job, or change of career you can ask for deferrments on most student loans. I'm not sure if things have changed, but the deferrments used to be a standard 6mo. with no payments. They can be extended under certain circumstances. This won't help with interest charges, but will help with cash flow in the short term.

[jaydub]

[ QUOTE ]
I'm pretty sure you can write of the interest from school loans from your taxes, so it is close to a wash on your income from the invetment.

[/ QUOTE ]

Only if you make very little money...

And to echo the others, definitely invest it.

[RacersEdge]

Depends on the level of debt and investment.

[James Boston]

Only invest it if you can meet these criteria:

1) You can presently and comfortably afford a regular payment on your student loan.
2) You have almost no risk on getting this 10% return.
3) The money invested is very liquid, so that in a time a financial hardship, you could cash it out immediately (penalty-free) and pay off debts.

I don't know about #1, but #2 and #3 are unlikely.

[HDPM]

as others have said, it depends. But think about a few other things. Investment is designed so you can live more comfortably and have a happier life. yes, you need to plan long term. But money is there to do things with. Part of living well means having things like an education and a house you are comfortable in. Investment is important, but why you invest is important too. I consistently see a lot of people saying to invest everything while you are in debt, and to leave debt outstanding to invest more. Sometimes this is probably right. OTOH, there comes a time when you want to live, live free of debt, and have more choices. More choices really boils down to more freedom. So I think a lot of people overrate how neat it is to have mortgage debt and education debt. "Oh, it's cheap money' "Oh, if you don't make much you can deduct the interest" etc.... All true. But do not underestimate the freedom being debt free can give you. Think of how comfortable you would feel investing then. Not saying don't invest now. Invest now and later. But IMO people overestimate how good debt is and underestimate how bad it is. It can make a big difference in how you live your life before you need your investments to pay a nursing home, that's what I am saying. You could end up working for the bank while you live and investing for the hospital. Again, not specifically telling you what to do with this particular hunk of money, but think about more than what the local investment seller might tell you.

[James Boston]

Good post.

I would like to add something else, related more to the psychology of debt. No offense to the OP, but I can almost guess his thought process. "I've already got this debt. I've been able to handle it so far. Now I've got some extra money, and I think I can make it earn more than the debt is costing." People, I think, get complacent with debt they already have, and start wanting to use the money they get to do things other than reduce the debt. To me, spending money on non-necessities before paying off debt is no different than borrowing money for that same non-necessity.

Is this investment so great that you would borrow more money (as long as it costs less than 10%) to but more of it. Probably not.

[BoogerFace]

As others have said, it depends. Do you have 2 months take home in a bank account? Do you have any other debt? Would the 10% be tax free? Would the money totally pay off your student loans?

[BruceInCA]

As other posters have said, if you already have 2+ months of living expenses in savings, investing isn't a bad idea financially.

However, when I paid off my school loans and my car, it was a great feeling. It was nice to be completely debt free. (Which lasted until a new car.) It's like a psychological weight lifted off your shoulders.

[Marlow]

Hi All,

Thanks for all the great relpies. I'm sorry I couldn't respond earlier, but I was working...

I agree that it seems right to invest that money and then use it to pay off the loan. But one poster hit on something that has been rolling around in my head, that I hadn't been 100% conscious of: the psychological implications of being debt-free. I have a family and a good job, but I also have an irrepressible wanderlust. Someday in the next 5 years, I'm going to want to travel for a good long while (with the fam), and it would be better if I was debt free at that time. Not sure if it's possible, but we'll see.

So I'm still not decided, but you all have given me some good stuff to think about.

Best to you all...

Marlow

[HDPM]

Good for you for thinking of it. I guess I should disclose a bias of mine and where I am coming from. I am looking at making a big decision. Part of the decision is financial. If we were overburdened with debt, the decision would be affected, and I might not have the option. We would be working for the banks, not to produce the life we want. I guess to be fair I should also say we have some money invested and more than 2 months savings. But we also had to knock out a lot of debt the past 7 years or so. School loans, credit cards, bla bla bla. All those cheap good debts that everybody said were so great that made it so it seemed like we had the same amount of money evry month. Automatic retirement investing is great. So is investing more than that (you should). But carrying the debt some investment sellers say is OK is more suspect IMO.

As I said once before, your grandparents weren't totally nuts when they lived in a smaller paid off house and didn't borrow money for cars or vacations. Maybe they should have bought some more mutual funds, the smart ones did. But they probably had a smaller paid for house and no car note to go along with them. /images/graemlins/smirk.gif