Pay School Loans Or Invest?


Hey, what’s up, John Sonmez here from simpleprogrammercom

I got a question about paying school loans or investing This is a good question It’s not always so obvious There’s a lot of details that can determine whether or not this is—it’s smart to do one thing or the other He says here, “Hi John, I currently have $31,000 in student loan debt at 4

57% interest I have no credit card debt, and no other debt I’m already maxing out my 401K and I have over 3 months of living expenses saved up I have the opportunity o pay my school loans off by the end of the year Is this a good idea? If there are any policies that eventually alleviate school loans, I could miss out on opportunities to invest in a software business or real estate

Thanks in advance for your input Best regards, Victor” Okay, so Victor, just to recap here, he’s got $31,000 in student loan debt at 45% interest He’s got no credit card debt

He’s maxing out his 401K and all that and 3 months of living expenses saved up He wants to know if he should pay off the school loans he could do by the end of the year The big thing here is this, right, this is kind of the principle behind this is what you want to do is you want to figure out—you want to pay off debt—okay, you don’t want to have debt unless that debt is actually earning you money than its costing you Let’s say—in this case he’s got an interest rate of 457% I’m assuming per annum, per year on 31,000

We could calculate, I’m not going to do the calculation now, but you could calculate and you could figure out, “Okay, well, how much is he paying in interest per year, 457%, how much money is that?” Now, if he took that money that he would be paying to pay those payments—pay that $31,000 if you’re thinking about paying it off If you took that money and you invested it somewhere else for a year would it yield higher than 457%? Because if it did, just as an “as if” let’s s ay that you get 10% on that money, well, what you could do is you could invest that $31,000 that you were going to use to pay off the student loan, get 10% on that and then take the money that you make on that, that 10%, everything about 457% and you could actually pay down the student loan whatever extra money that you make and still make money and still be in a good situation

You’re essentially using that 457, you’re going to clear whatever—you’re going to pay interest on the 457% of the 31,000 but you’re going to make interest on what the difference is between that 457 and the 10%, so 525%

That’s the key there The question is can you find an investment that’s going to earn you a 10% return? I personally think real estate is an investment that could do that, but are you willing to do that? Is that what you’re wanting to do? If you’re doing it about just investing it in mutual funds or stock market, you’re not going to get that kind of return You’re not going to get a guaranteed kind of return It’s not going to be enough and you’re going to pay taxes on it so it doesn’t make sense I would lean heavily towards paying off the student loan and getting that cleared out especially now because right now interest rates in banks are low, you’re not going to make money putting money into the bank

There’s not a lot of places that you could invest securely that you’re going to guarantee a higher rate than 457% If you think of it this way what you’re doing when you’re paying off the student loan is you’re essentially earning the 457%, because you’re saving 457% in this case

That’s what you want to think about is just think about it that way That’s why if you have credit card debt and you’re—some people say, “Okay, well, save money and solely pay off your credit card debt” No, no, no Don’t save money until you’ve paid off your credit card debt because you’re paying interest on that You’ve got to pay off that first

You want to maximize that If you’ve got multiple—a lot of you have multiple debts, look at each debt and see what the interest rate is on that When I was paying off my properties, I have a lot of real estate, I’ve paid off a lot of those properties I didn’t just pay off properties randomly I paid off the higher interest rate ones first because that makes sense

Some of the properties I’ve actually held on, even though I had the cash to pay them off, I’ve held on to the loan because if I’ve got a lot at like 3% I can easily make more than 3% on an investment so I’m going to do that So think about it that way This is kind of—the key thing is that you want to weigh it against what you could possibly invest in Now, would you have some kind of opportunity that might come up where you could invest in some startup or something like that? Possibly, but do you want to take the risk there? That’s going to be—if you pay off your student loan you’re guaranteed going to save you 457% interest on $31,000

That’s guaranteed what you’re going to earn If you take a risky investment that might yield 5, 10%, 20% it might give you zero and then you’re still going to be paying the student loan debt as well, so you’re going to end up in the negative Don’t take one of those opportunities and think that you’re going to miss out Pay off the student loan especially if you can do it in 1 year, unless you’ve got something solid that you’re going to invest in if you’re going to buy a duplex, you’re going to buy some real estate, again, if you want to check out my info on that, I actually have a real estate course for software developers specifically

You can check that out and I’ll give you some straight up advice that I think could be the 457% interest on your student loan But if you’re not going to do something like that that’s going to be very secure, then I would just say pay it off, but always use that principle to evaluate it All right, if you liked this video, go ahead and click that subscribe button below if you haven’t already and I’ll give you all the videos that I do I do a lot of videos on finance, on fitness, on really becoming a better version of yourself, personal development as well as improving your career as a software developer

You could check them all out by clicking that subscribe button below If you want to get every video I do, every single time that it comes out, click the bell and you’ll become like a super subscriber and you’ll get a notification every time a video comes out Yeah, so I’ll talk to you next time Take care

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