How to Invest While Paying Off Student Loans

paying down your student loans

By Andrew Rombach – Guest Author

The struggle is real for many recent college graduates. The cost of college is outpacing inflation, and the national student loan debt toll is at an all-time high in the trillions. Spread over 40 million college students and graduates in the United States, many borrowers find themselves in a difficult position after they graduate.

The combination of a starting salary and high student loan payments can make it difficult to establish yourself financially. This is true in many different ways; for instance, student debt is often blamed for delaying a home purchase or starting a retirement savings account. Alongside these two milestones, building an investment portfolio is also put on the backburner.

Investing your money is a well-known path towards building greater wealth down the road. For many consumers, it’s an essential part of the financial game plan. While this may be the case, it’s already been mentioned that student loan borrowers are forced to put off investing, opting to pay off student loans instead. However, you don’t have to accept this delay.

There are ways to manage your loans before or during an investment strategy that may be able to free up cash. If your financials are manageable, there’s no reason you can’t both invest and pay off your student loans at the same time.

Prioritize High-Interest Student Loan Debt

One of the biggest hurdles to investment is high-interest student debt. If rates are too high, it may be more difficult to invest for returns that outpace loan interest. Either paying off high-interest loans or reducing interest rates should be the first priority for an investor – it’ll reduce the overall cost of your loans. There is more than one way to pull this off.

To start, focus on paying off high-interest loans first, by considering the debt avalanche repayment method. This involves making minimum payments on all loans while making larger payments on the highest-interest student loan. You pay more on the high-interest loan until it’s paid off and repeat the procedure for the next high-interest loan. This is one of the faster ways to get rid of high-interest, expensive debt. Just remember that this requires solid budgeting and high income; the avalanche method requires capital and time.

If you want to reduce your interest rate, then you may want to consider refinancing your student loans with a private bank or lender. When you refinance your loans, you apply for a new loan, which is used to pay off the old student loans. The new loan comes with a new interest rate and repayment term. Ideally, the new rate is lower than your old interest rates which may save money each month during repayment. This can free up cash over time, but you should only apply if you have high income and strong credit (eligibility criteria may be prohibitive).

Finally, without the credentials to refinance or the cash for debt avalanche method, you may be able to secure an interest rate discount by signing up for autopay. By signing up for automatic monthly payments, some borrowers can get an interest rate reduction of 0.25% or 0.50%. Many private student lenders and federal student loan servicers offer an autopay discount. This can be a good starting point to reducing interest and setting aside more money each month. The first step is contacting your lender to make sure the discount is available.

Do Your Research and Establish an Investment Strategy

If your loans are more manageable now, then start thinking more about how to actually invest. If you’re working hard to manage your loans just to invest, you don’t want to throw that hard-earned money at a lost-cause investment. Before you make any commitments, it’s very important to get educated on the various investment vehicles as well as how they perform over time. With this knowledge, you should be able to make a plan without the fear of starting out.

Start your research online. There are numerous resources available from private, government, and non-profit sources. You should easily be able to find guides on the different investment vehicles, investment strategies, market trends, and risks. For example, here’s a government-provided guide for investment vehicles, and this comprehensive introduction to investing from the government could be another great starting point. If you find yourself asking more questions as you learn, there’s nothing stopping you from findings answers on the go. 

If you have really tough questions, then maybe consider contacting a professional financial advisor. He or she could offer personal insight and advice. Ideally, initial advice would be free of charge, but keep in mind that advisors charge fees for their services. If you were to work with them moving forward, they would charge fees on any accounts they manage.

Find Low-Cost Entry Investments

Armed with knowledge and saved-up cash at hand, it’s time to actually make an investment after spending so much time dealing with student loans and learning. Depending on where you are in repayment, you may not have as much cash saved up at this point. However, you can still easily get started. The trick is to look for ways to invest with low entry costs.

Starting with investment vehicles, finding a fund or option with a low buy-in and/or low fees is important, especially if you’re starting with low cash. There will be a wide range of options to choose from, so you need to know what a low fee is. To give you an idea of what to look for, here is an old list of ETFs from CNN, highlighting low fees ranging from 0.03% to 0.07%. 

Knowing which investment vehicle to start with is important, but investing with the right company or platform is equally impactful. You should choose a platform that offers low membership fees and account minimums. For example, there are robo-advisor apps and online applications that require very little to open up accounts (as low as $5). There are also peer-to-peer lending platforms (P2P) that allow investors to get started with relatively small amounts.

Summing It Up

It may seem hard to invest while paying off student loans, but it is entirely possible if you take the right steps. To start, you need to focus on your student debt – needless to say. This could mean paying off a meaningful amount of high-interest debt, or it could involve getting lower interest rates with a discount or student loan refinancing. Either way, you should work towards reducing the monthly obligation from student loan payments.

By managing student debt, you may be able to free up cash moving forward which can be saved for an eventual investment in the near future. Make sure you do enough research beforehand, and start investing small amounts to experiment. After getting your feet wet, you can gauge how well you know the investment game and make decisions based on your performance. You may just find yourself ahead of the pack of student loan borrowers when it comes to smart investing.

Andrew is a Content Associate for LendEDU – a website that helps consumers, investors, college graduates, and more with their finances. When he’s not working, you can find Andrew hiking or hanging with his cat Colby.

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