Today’s post is from Jon Haver who has paid off his $23k in student loans in 3 years and is sharing advice on how others can financially thrive with student
loans. He writes at Pay My Student Loans.
Month after month, you find yourself making payments to bring down your debt whether it is your mortgage or your student loans. You dream of a time when you can live debt free. The two biggest debts in this country are mortgages and student loans, respectively. There are very few students who are lucky enough to graduate debt free.
Should you wait to start investing until you have paid off your student loans or mortgage or both?
Debt is usually broken down into two categories, “good” and “bad”. Good debt is used in reference to any debt that is meant to increase your net worth. Both student loans and a mortgage are considered good debt. Bad debt is everything else. It is used to refer to consumer purchases that will eventually lose their value. Car loans and credit card debt are both examples of this.
There is no question that investing while you are carrying bad debt and paying 19% interest rate is a bad idea! However, when it comes to student loans and mortgages it’s not as clear cut.
All debt eventually needs to be repaid. Always try to get rid of bad debt first. These debts are almost always higher interest, so you’ll save money by eliminating those first. Once that is taken care of, move your attention to your other bills.
There is no clear-cut answer on which debt, student loans or mortgage, should be paid off first. Take all of your options into consideration, and make the decision that works best for you.
How much do you owe?
Try to pay off the smaller debt first. It will be quicker and will open up extra money faster. The pride in making a final payment on either debt will help motivate you to continue on your path to being completely free of debt.
Which has the higher interest?
Having a high interest rate is great motivation for wanting to get rid of a debt. That high interest rate means you will be paying a huge amount of money if you take a long time to pay off the debt. To save money in the long run, get rid of the debt with the higher interest rate.
If the interest rate is adjustable, you’ll want to move that one to the top of the priority list. While it may not be the debt with the higher interest rate at the moment, it risks becoming so. With a fixed-interest rate, at least you’ll know what you’re up against for many years to come. The uncertainty involved in an adjustable rate can be worrisome. Always make the decision that will cause the least amount of worry.
Both debts are tax-deductible. However, it may be better to get rid of the student loan first, if taxes are taken into consideration.
The interest on mortgages is tax-deductible for everyone. However, tax deductions on student loans get phased out once annual income reaches a certain level. Even if you are still qualified for a tax deduction because of your student loan, there is a cap at $2,500. If you do not qualify for the deduction, or if the $2,500 is not worth it, you might want to consider paying off the student loan first.
Invest Before Paying Off All Your Student Loans?
By most calculations paying off student loans first and then investing makes financial sense. However, what the number crunchers forget to take into account is the benefit of setting up a system and making investing a habit at an early age. If you can make investing a habit at an earlier age you will be in far better financial shape later in life.
One scenario recommended by people is to allocate 90% of your available money to pay off loans/invest to paying off your student loan but still invest 10%.
Invest Before Paying Off Your Mortgage?
Mortgage typically take 20-30 years to pay off and if one was to wait until their mortgage was paid off before they started investing they would be far behind in their retirement planning.
Bottom Line – Pay Off Credit Card or Student Loan or Mortgage or Invest?
Pay off bad debt first, continue making mortgage payments, pay off as much as possible on your student loans while still investing a token amount each month in order to set up your investing systems and develop the investing habit.
If you have student loans and a mortgage did you start investing before they were paid off?