Should You Pay Off Student Loans or Invest?

If you're wondering whether to pay off student loans or invest, first look at your current financial situation.

How is your monthly cash flow? Do you have money left over after covering your necessities — also called discretionary income — or do you feel like you're living paycheck-to-paycheck?

What about an emergency fund? Is there a safety net in case unexpected expenses pop up?

In an ideal financial situation — high disposable income, no high-interest debt — here's what your money landscape should look like:

• At least three months’ worth of expenses saved up for emergencies.

• Ten to fifteen percent of income going toward retirement.

If you've hit these goals or you're well on your way, here’s how you can decide whether to use any leftover money to pay off student loans or invest.

» MORE: New law makes it easier to pay student loans and invest

If you have high-interest student loans

A general rule of thumb is to invest instead of aggressively pay off your student loans if the average return on investment is higher than your student loan interest rates.

A conservative but plausible return on investments is 6% per year. If your student loan interest rates are higher than that, you’d save more money by paying them off — and avoiding interest charges — than by investing.

If your student loan interest rates are less than 6%, consider putting extra money toward retirement or a brokerage account for non-retirement investing. Over the long term, your investments could potentially earn more compared to the savings from paying off those loans.

Remember, the more time you allow your money to sit in an investment, the more compound interest can work in your favor. By investing when you’re younger, you give your money more time to grow. See how much you could gain by using a retirement calculator.

If you have federal student loans

Federal loans generally have lower interest rates than private loans and come with more benefits, like Public Service Loan Forgiveness, where your remaining balance is discharged after 10 years of monthly payments. If you only have federal loans and you qualify for a forgiveness program, investing rather than paying them off could make more sense.

If you have private student loans, there is less to lose by prioritizing repayment — and potentially more to gain by refinancing. Student loan refinancing can decrease your interest rates, letting you pay loans off faster and free up money for other financial goals, like saving or investing.

Refinancing will save you the most money if you have a credit score at least in the high 600s and stable income. Refinancing federal student loans can be risky because you’ll lose federal benefits and other protections. Be sure you won’t need those benefits before going this route.

» CALCULATE: Should you refinance student loans?

What is your personal money goal?

For some, being debt-free is a top priority. If paying off student loans early is a major personal goal — and doing so would relieve a burden and bring more joy than having a hefty investment account — go for it.

To aggressively pay down your debt, you’ll have to pay more than the minimum payment. Opting for biweekly payments rather than monthly could make this a bit easier. Some lenders will even let you make multiple payments a month automatically.

Other ways to prioritize repayment could include using tax refunds and extra income from side jobs to make lump-sum loan payments on your balance. You can also look to your employer for benefits, like an employer student loan repayment program, to help you pay off your balance quicker.