My wife and I both recently finished with graduate school. The majority of our friends and colleagues are in the same situation. And with this pursuit of education also comes student loans for most. I was fortunate enough to be in a program that not only paid for my tuition, but gave me an annual stipend over $20,000. My wife was not as fortunate and accrued a good bit of student loan debt. One of the things that I keep telling her is that we are not going to scrape all of our money together over the next 5-10 years just to pay our student loans off early. And she keeps saying; 'but I don't want that kind of debt around!'. And so I figured if she is confused as to why we're not paying it off, then I should explain it to you the reader.
To get right to the point, student loans are almost like free money because of the low interest rates. As long as the loans are from the government and not a private loan company, than this strategy should work for you also. If you're out of school the chances are that you have a job and that job offers a benefits package with a 401(k) or a 403(b) plan. If you look back at the stock market and disregard what is going on right now, then you know that the average annual return of a basic market fund is much higher than the interest rate that you will pay on your loans. What does this equate to? This compound interest and earnings makes a big deal in the long term. Have you ever seen a chart that shows how much money you will have at retirement if you start investing at 30 as opposed to 35 years old? That's why I feel it is so important to start investing early no matter what your style of investing is.
Most student loans have 15 to 30 year payback terms. If your interest rate is low like ours when we locked it in around 3%, then this investing idea will work well for you. I'm not sure if people with newer loans will have that much of an advantage with the current loan rates around 6%. I honestly think this is a pathetic attempt by our government to allow people a higher education. If you keep the interest rates low for students then more people will be inclined to go to school. This increases professionalism in our work force and builds our economy. I think I should write Bernanke and Paulson a letter...
I will not be value investing with the money that I would have used for paying student loans faster. I will be much more aggressive because we are young and don't have kids. I'm a huge fan of telling people to take some investing risks while young to try to gain that financial edge that comes with hard work. As many of you know from reading previous articles from the site, I am a forex trader with a drive that is unparalleled. I have worked hard at my current career as a scientist, and just as hard as an investor.
So if you feel that you can make 10% or more per year in the market, put the money you would have used to pay off your student loans to good use. If any of you have a success story from this I would love to hear it. Good luck my fellow investors.
