🎓 Should I pay extra on my student loans or invest?

Deciding whether to pay extra on your student loans or invest that cash is a classic financial dilemma. Prepaying your debt guarantees a return equal to your interest rate, while investing offers uncertain but potentially higher growth.

This calculator weighs both options. It compares the guaranteed interest saved against potential market gains over the same timeline, while factoring in forgiveness programs that change the math completely.

Federal Student Aid notes that the Standard Repayment Plan pays off your loan in 10 years with fixed monthly payments. Every extra dollar you pay reduces your principal balance, yielding a risk-free return at your loan's interest rate.

However, prepaying isn't always smart. If you have low-interest debt, you might beat that rate in the market. More importantly, if you are pursuing forgiveness, extra payments might just reduce the amount that eventually gets wiped away.

Federal Student Aid explains that under Public Service Loan Forgiveness (PSLF), remaining balances are forgiven after 10 years of qualifying payments. Income-driven repayment (IDR) plans can also lead to discharge after a set period.

If you are on track for forgiveness, prepaying is usually throwing money away. Extra payments shrink a balance that the government would have cancelled anyway, making investing the clear winner for your spare cash.

Investing your extra $300/month could outpace your loan rate, especially over long horizons. But market returns carry risk. To account for this, we require your expected return to beat your loan rate by at least 1% to recommend investing.

We simplify by ignoring taxes on gains, variable income, and the emotional relief of being debt-free. Note: if you have an unused 401(k) match, capturing that match almost always beats both prepaying and standard investing.

For further related reading, check out:

• Federal Student Aid
• Federal Student Aid