Student loan debt vs. investments: What to prioritize

http://www.savingforcollege.com/articles/student-loan-debt-vs-investments-what-to-prioritize-906

Zina Kumok, Guest Contributor

Coming out of college, student loan debt is almost always categorized as the highest financial priority a graduate should have. But while eliminating debt is always beneficial, could focusing too much on paying back those college loans actually be bad? Many experts claim the money spent paying back the government or a private lender could be put to better use in an investment scenario, and that strategy is starting to gain steam nationwide.

So which is it? Should people with student loan debt have tunnel vision, or embrace a more nuanced financial strategy that prioritizes investing?

RELATED: How to pay off debt while saving for the future

The Case for Focusing on Student Loan Debt

Carrying debt is more of a psychological burden than a financial one for many people. Even if a young couple has a positive net worth, debt can weigh heavily on their minds. And having loans on your credit report can also have other ramifications.

If you're trying to buy a house or apply for a business loan, your debt-to-income ratio is an important factor that lenders will use to determine your creditworthiness. If your loans are too high when compared to your income, you may not qualify for a mortgage or other loan product.

That may not be a significant factor for some, but huge portions of the population would be negatively affected by choosing to ignore their loan debt. If you're an aspiring entrepreneur or hoping to purchase a home in the near future, pushing aside your debt is probably not the smartest option.

RELATED: 7 things you may not know about student loan repayment

The Case for Focusing on Investment

Unless the interest rate on your student loans is more than 5%, investing in the stock market is often a better option than focusing on debt payoff. It's not a guarantee, but choosing an index fund with low fees and paying the minimum on your student loans is very likely to yield higher returns in the long run.

Plus, you're allowed to deduct up to $2,500 in student loan interest every year—unless your income is too high. That's one benefit to letting your loans hang around longer.

Investing also gives you more flexibility than just paying the maximum on your loans. If you invest your money, you can always take it out if you lose your job or want to buy a house. Once you put that money toward your loans, you can't get it back.

There's also a case to be made for getting your foot in the investment door as early as possible, even if you can't contribute much. Compound interest shows that investing a little bit over a long period of time is often better than investing more in a shorter time frame. In other words, focusing on investment early on could open you up to a higher potential return for less effort.

RELATED: Understanding your student loans and how to repay them

Thankfully, parents who invest smartly can ensure their children never have to deal with this dilemma by starting a 529 plan as soon as they're able. They can take the amount they were putting toward their loans and start college savings funds for their children, preventing a future generation from struggling with the same student loan setbacks.

This calculator can show you the benefits of saving for your child's college instead of having them take out student loans.

RELATED: Should you refinance your student loan?

Zina Kumok is a writer for TraditionalIRA.com and RothIRA.com specializing in personal finance. She started covering personal finance while blogging about paying off $28,000 worth of student loans in three years. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, Daily Worth and Time magazines.