Which is better? Paying down student debt (~60.000) or investing

Question

Hi,

My name is Giovanni and I'm a 30-year-old single dad to a 6-year-old daughter.  I currently have about $80k in tax-advantaged accounts (401k, Roth IRA, HSA) and as of last year I've maxed out those accounts.  Additionally, I invest $200 per month to a 529 account for my daughter's future academic endeavors.  I also have roughly $10k in savings for an emergency fund, etc.

My gross income is $137,000 +periodic varying bonuses.  I have student debt amounting to about $60,000.  $44,000 of this debt is federal and currently isn't subject to interest rates due to the government putting a hold on this.

Without getting into the nitty gritty, I've got about $1000-$1500 per month of "extra money" (Mindy would hate me for saying that).  This "extra" money is after I pay the minimums of my student loans, car payment, mortgage payment, utilities/electricity, etc.  I also leave myself about $1000 per month to account for varying expenses such as groceries, gas, gym memberships, doctors appointments, and of course other varying costs that come along with being a single dad!

My question is this: Should I aggressively be paying off the student loans before I start investing?  Or should I just continue paying the minimums and use this money to invest in either a brokerage account or real estate.  I've kind of gotten the real estate bug thanks to the many books recommended on the podcast.

Any guidance would be greatly appreciated.  I feel very fortunate to be in this position where I have adjusted my lifestyle over the last year or so to allow myself to live frugally and free up some extra money.  I've come to terms with the fact that I'll be "rich" when I turn 59.5 but I want to start developing wealth in my younger years to potentially consider coasting or retiring early in my 50's.

Thank you!

Giovanni M.

Brock Mogensen · Answer

My approach would be to pay minimum on student loans and put everything else in real estate.  The way I look at it is if you are paying maybe 4-5% interest on student loans and can make 10%+ on a real estate deal.  Why wouldn't you put that $ into a deal.  I actually figured out a way to indirectly leverage my student loans to buy my first property :)

John Leake · Answer

When it comes to debt I always look at the potential returns, if the cost of the interest is low enough 3-4% and you can invest the extra money you would use towards paying down the debt for 5% plus then the money is better spent over the long run on the investment. Typically real estate returns get better the longer you own it through appreciation and rent raises. You also get some write offs through depreciation and expenses that can help offset your earned income which as a higher earner could have a really big impact for your tax bill form uncle Sam!

Jon Kelly · Answer

@Giovanni D Midili I was in the same fork in the road as you 5+ years ago (except for the child :) ).  I decided to invest in real estate and continue paying the minimum student loan payments for two reasons:

1. I assumed I could earn more from real estate investing than my interest rate on my loans. My weighted average interest rate on my loans was around 6.5% (I’ve recently refinanced down to 4%).

2. I didn’t want to delay my real estate journey any longer. I had the bug, just like you, and didn’t want to find another excuse not to dive in. I could’ve paid off my student loans in full by now, but real estate investing is much more exciting!

5 years later, I continue to pay the minimums and use all excess $$$ to fund my next deal. It’s the best decision I made.

It’s not just about the number of properties, doors or monthly cash flow. It’s the extra 5 years of experience, knowledge and relationships gained.

Bjorn Ahlblad · Answer

@Giovanni D Midili welcome to BP! You have a lot more financial discipline than most. Certainly mor than me. I suggest paying off the 16k student loan on which you are paying interest. Pay off the car loan too. Have enough money to get into a cash flowing property or perhaps a syndication or two. Make sure you have mastered the numbers before you dive in. All the best!

Theresa Harris · Answer

As $44K of your student debt is interest free at the moment, I wouldn't pay it down faster unless that debt is preventing you from doing something else.  Find out how much you can borrow from the bank for a mortgage, how much houses are in the area you're looking at and if the numbers make sense (could you buy a house with 20% down and have the rent cover all of your expenses?).

Paul Moore · Answer

@Giovanni D Midili you got some great advice above. I would take your estimated return on any investment and multiply it by a risk factor two calculate your ROI from real estate. For example, if you are 90% sure the investment will make 8% or more per year, I would consider that 8% times 90% equals a 7.2% return. As long as that is somewhat higher than your student debt interest rate, I would do the investment. All day long.

That said, for very small balances, there might be a benefit to paying them off as others said. Happy investing!

Evan Polaski · Answer

@Giovanni D Midili, as Bjorn mentioned, I commend you on your financial responsibility.

The answer really depends: presumably, the student loans carry a low interest rate relative to typical investment returns.  So from a financial standpoint, if you can continue paying the minimum and putting any additional into income producing investments that can return a rate higher than your interest rate, you will net ahead.  BUT, all investments carry risk.

The case for paying off the debt faster is more psychological.  Not feeling the stress of being under the debt can be freeing.  It may not make the most sense financially (assuming your investments actually all pan out and more than cover the debt), but you can sleep better at night not having to stress.

Where my wife and I settled, given our loans coming out of college (and in hindsight they were extremely low interest: 2% on federal, about 3.5% on private, with one small one carrying about 6%, I believe) was to take roughly half of our left over take home and pay down loans, and the rest goes into savings/investments.  We both fully funded our 401k's at work, so we were investing more than just half of the left over.

Giovanni D Midili · Answer

Thank you all for the great advice.  I'm still figuring out the formatting of the forum so I'm sorry if this isn't the right way to reply!

My federal student loans are around 4% (0% for now..) and my private loans are between 5%-7%.

I think I like the idea of paying down the private loans because they don't amount to much.  And I also like the idea of splitting the remaining money to both invest and pay down the debt.

Alex Kirkendall · Answer

The only perspective I would add to the above comments and my personal view on it (which might not be technically the best financial strategy) would be to pay off the debts that are not working as assets.  In other words, is there any potential that you will make money off your student loans in the future…no.  Any potential on making money on your car loan?  Probably not.

I would put those off first, or at least as big a portion as you can (at $137k a year you should be able to make a dent in these quickly).

Reserve your future debts for assets, something that is going to bring in money.This ultimately comes down to a mindset for future financial growth and can set a precedent for future decisions on taking on other debts.

Humbly - AK

Glenna Wood · Answer

If the student loans impact your DTI so that you can't get the best terms on a loan for an income producing property, then pay them down, highest rate loans first. If not, they are cheap money overall so pay as is and focus on getting investment property. Discipline pays off! Your daughter will learn and greatly benefit from her Dad's smart money moves. Best wishes!

Which is better? Paying down student debt (~60.000) or investing

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