Why I’m Investing NOW And Not Paying Off My Interest

I’ve had this question circulating around my head for a while and thought I would share my answer.  Should I be investing my extra money or should I be paying off student loan interest that is accruing while in school?

I think both options are good but I do believe one is better than the other. I’ll explain as to why I believe it to be better. Just know that there isn’t a wrong answer.

I Am Investing

I’m choosing to invest my money that I somehow make during the year.

So why am I doing this?

Well, some reasons are that my wife has a full-time job so we have all of our living expenses covered by her income. I want to make a habit of investing. I enjoy watching my money work and increase over time. I feel like the benefits of investing now outweigh the benefits of paying off my interest from my loans. I don’t want to miss out on tax-advantaged investing if I can help it.

The money I contribute to that account will still be working 30 years down the road. While my student loans will be dead and gone well before 30 years (hopefully in 5-6 after graduation).

You can only contribute $5,500 annually to an IRA. You can’t go back in time and contribute to it from the previous year. If you missed out. Then YOU HAVE MISSED OUT. If I’m not contributing to my Roth IRA during dental school that is 4 years I am missing out on contributing to the tax-advantaged account.

I am NOT going to miss out on the ability to avoid Uncle Sam and the extra years of compounding interest.

Another thing, if for some reason I need the money while in school I can withdraw the money I have invested. If I were to pay that money towards my student loans it is gone.

Time

Well, if you haven’t read my post about why you need an IRA … then you might want to do that because it really demonstrates how time is your friend. When it comes to investing, The Sooner the Better.

Ten years of investing with compounding interest is a HUGE deal. The difference of a few years (specifically 4 in my case) quite literally will be a difference of thousands of dollars in the future.

Now I’m not actively selecting my funds, I’m just investing in the simple things like VTSAX. I could go for a larger risk and choose something else but I don’t feel like putting in the research required to properly select the shares I would want in my portfolio.

So I’m just investing in simple index funds.

Don’t get me wrong, I enjoy researching what shares I should purchase, but I need to be studying for an exam instead. So I don’t have the time to properly evaluate certain things. I know that Index Funds are going to perform well overall and they are considered a low risk, so that is why I am going with this option.

Side note:

I’m not trying to beat the market by any terms when it comes to my portfolio.

If my investments somehow beat the market, that’s awesome! But if they don’t, cool. It will still be more money than what I initially had one way or another.

Honestly, as long as it allows me to retire with a piña colada in my hand, looking over the ocean while chillin’ in a beach chair who cares if I “beat the market” or not?

Remember investing is for the long term, it’s not for the next day or even the next year.

Debt

But, but, but the interest on your loans! You’ll be in more debt later on. Yeah, I’m going to be in a lot of debt… true. I’m a dental student, I knew that I was going to be in a substantial amount of debt going into this. I was going to be in a lot of debt even without that interest.

These loans won’t start to capitalize interest (the interest gains interest) while I am in school.  Actually, the loans won’t start to accrue any capitalized interest until after that six month grace period. (You know that moment when they hope you can find a job so you can actually start paying them back). The student loans I am withdrawing are fixed at 7%. Until I refinance those suckers.

Ok .Fine, still don’t believe me? Lets quickly look at the difference in debt if I paid off the interest that is accruing while in school.

Numbers

Being a full-time student and working very seldom (if at all) means I don’t earn a lot of money during the year… hardly anything really. However, I’m going to be extremely optimistic and say I can make roughly $2,000 a year from the side gigs I do. I could use that $2,000 in three different ways.

  1. Pay a small portion of student loans
  2. Invest it
  3. Spend it
Pay Towards Interest

Personally, I have no plans on keeping my student loans longer than 5 years after I graduate. But if things don’t go according to plan… ehhh … I’ll say 10 years to pay off the student loans after graduation.

Now, dental school is only 4 years so that will be $8,000. When compared to $320,000 that’s only 2.5%….. that’s basically nothing.

But we want to start paying off student loans while in school. So my first year I contribute 2k towards my interest. Which doesn’t capitalize while in school nor during the grace period, may I remind you.

Now you look down the road in about 14 years (14 because 4 years of school and then 10 years to pay it off), I have saved myself an extra $815 in interest because I paid it now during my D1 year. By doing this every year for the four years of school, I will have prevented approximately $4,545 from accrued interest.

Add the $8,000 I initially contributed and I managed to pay/prevent a total of $12,500 towards student loans.

Not bad.

This is also a guaranteed route. You know once you pay that interest it will no longer accrue interest.

Invest It

Again I’m going to be a little bias here because this is what I am doing so take it for what it is worth.

Let’s take that 2k I am making annually and dump it into a Roth IRA, shall we? I can do this because my wife is working and we file jointly and I also file taxes from the money I earn from the side gigs. Otherwise, you would have to toss it into a taxable account.

2k that first year with a hypothetical 7 APY. That $2,000 turns into $2,140 that first year! Ok yeah, an extra $140 big whoop? This is where the power of compounding interest is easily overlooked. That $140 will gain interest the following year then that interest will gain interest etc. etc. etc.

This is how money grows and it is awesome to watch. Anyways, we are now looking at retirement which for me is at least 30 years down the road.  Alright so after 30 years from the original 8k I have contributed we are now looking at a rough estimate of $67,600!

This for me is awesome. First, that is $59,000 I didn’t have to work for and second, these investments are in a tax-advantaged account.

Spend It

I don’t recommend this.

But if I were to spend that $8,000 it would probably be one of two things.

Food, or if I managed to somehow save all of that money buy a motorcycle.

Not much more I can write for this segment. When you spend it… you spend it and it is gone.

Maybe instead of spending the money if you have other debts with a higher interest rate of 7% (Like a credit card), you should be trying to pay that off.

Do I Invest With Student Loans?

I have thought about this over and over again. And I’ll tell you what…

It is tempting!

But I have this thing against investing on margin (borrowing money to invest). If I were to use my student loans to invest with I would be doing just that (I think this is illegal anyway). I just don’t think it is a smart idea to use someone else’s money, that is accruing interest, as part of your portfolio.

I don’t think you should take out more loans than you need. I mean do you really need to invest while in school?

Probably not.

Would it be nice? Absolutely.

I do know that there are individuals that use student loans to invest with. Mathematically it makes sense and could be a reasonable thing to do. But is it worth the risk? Using others’ money for your own benefit? For something that doesn’t even have a guaranteed return? The investments could lose their value just as easily as they can increase in value.

So no, I am not investing with student loans.

No Wrong Answer

If you feel like debt will be a huge burden and it is traumatizing to think that you could have been making payments towards interest during school, then you already know what you should do. And that’s totally ok! This is a safe and guaranteed return, paying off debt is a guarantee.

Or if you are like me and like taking a risk, I really enjoy taking risks to the point it may be a bad thing, then investing in a tax-advantaged account could be the right answer for you. But there is absolutely no guarantee with the market the money could increase or decrease. It is a risk.

Actually… Spending the money frivolously might be a wrong answer. Other than that, I don’t think there is a wrong answer. To be honest, what you do with your money is your decision.

I’m just telling you what I do with my money, that I earn, while in school. Tell me what you do with your extra cash.

 

5 Comments on “Why I’m Investing NOW And Not Paying Off My Interest”

  1. Although I agree that sometimes investing over paying off debt is a smart choice, it is hard to argue against paying off student loans first. They are not like most loans and can really weigh you down if not paid back. I disagree with other on investing over paying off debt, but I think paying off student loans first makes more sense for most people. All situations are different, but would pay off my student loans first, then invest for retirement. After you reach a certain level of saving/investment, then start paying off secured debts (car, house, etc.).

    1. I see your point and I do agree with it. The thing that’s rough for me is that I am currently in school at the age of 25 once I graduate dental school I’ll be 29. Then if I decide to do a GPR or AEGD that will be an extra (roughly) 2 years or 3 if I go Ortho/Perio/Endo.

      Now I’m 31 and I haven’t even started saving/investing for retirement. That’s a few years that I am missing out on a tax-advantaged account. Also if things get heavy I can withdraw from my Roth IRA to help me out… without having penalties for doing so.

      Debt from my student loans, business (that I will buy) and house for some reason don’t feel like a large burden to me. Feels more like leverage. Granted I’ve never had any debts previously. No credit card balance, no car payments, no student loans from my undergrad. Nada.

      The only debt I’m currently in is the federal loans given to me for dental school. Now I might be wrong about how I’m going about this, but feel free to follow me for a few years after graduation and I’ll tell you if I regret my decision!

      -FSD

  2. I would differ with you on one point, yes you are investing with student loans. You earned $2000, so you didn’t need to borrow the last $2000. You went ahead and borrowed it anyway, even though you didn’t need it, and invested it in your IRA. You really can’t distinguish the difference between the $2000 you earned and the $2000 you borrowed. It all comes out of the same budget.

    Best of luck on your journey. If you are thinking about these issues already, you will win the money game.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    1. Thanks! it is a fun game to play.

      I see your point, took me a while to think it over but I see what you mean. Looks like I will be investing with student loans for the next few years then. I imagine it will turn out ok in the long run. At least that is what I keep telling myself.

      -FSD

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