Should You Aggressively Pay Off MBA Loans or Invest Elsewhere?

KEY TAKEAWAYS

Choosing between paying off student loans or investing can be difficult because there’s no universally correct decision.

When you graduate from business school with a costly, new diploma, instinct tells you to latch on to the first decent job offer an employer throws your way, and then whittle down your student loan debt as best you can. But what about investing those first earned dollars in the stock market? The more money you put in, and the earlier you put it in, the more money you can potentially get out of it for retirement, buying a home or whatever other significant financial goals you have.

If you brood on this long enough, most graduates can’t help but ask themselves: Is there a better place for me to put my money in? In other words, is it better to pay down student loan debt or invest in something else entirely?

MBA graduates usually find themselves faced with this similar dilemma. Should they use the money to pay off that pile of debt they’ve accumulated, or is it more advantageous to put the money to work in investments that will grow for the future? Either choice can make sense, depending on the circumstances. Paying off student loans or investing isn’t always a clear-cut choice. Although it’s often good to get out of debt earlier, sometimes it pays off more in the long run to put more of your funds toward building up your investments.

Investing vs. Debt Repayment

Investing is a way to set money aside for the future, ideally in an investment vehicle such as stocks, bonds, or mutual funds that will grow in value over time. Debt, on the other hand, represents money that you’ve already spent and that a lender is charging you interest on. Left unpaid, that debt will grow and grow, with interest charges adding to your balance and incurring interest charges of their own.

The Case for Investing

You can save a lot of money by aggressively paying down your student debt, but what about the stock market? Compound interest, that property your economics professor would preach about daily, can earn you a lot of money, if you make the right choices. As a general rule, if you can earn more interest on your money by investing it than your debts are costing you, then it makes sense to invest. If you have a mortgage with an interest rate of 5% and a stock market index fund that is returning 10% a year, you’ll come out ahead by investing your extra cash in the index fund.

On the other hand, if you have credit card debt at 20%, you would be better off putting your extra cash toward paying that debt rather than investing it in the index fund. Unfortunately, it isn’t always that straightforward. Investments can be volatile. That index fund might be up 10% this year but down 10% next year. While there are investments that pay a guaranteed interest rate.

Another factor is more psychological: your risk tolerance. If you are comfortable taking the gamble that your investments will bob up and down with the markets, sometimes rising in value and sometimes losing value, then you are a better candidate for investing than someone who would lie awake at night worrying about what the market might do tomorrow.

The Case for Paying Down Debt

This can work, but you need a high enough and steady enough income from your first job. You will have a lot of trouble paying off your student loans early if you’re already struggling with rent and utilities. Get a roommate or live at home for a year or two if you want an easy way to cut expenses and use the money to pay off the student loans. You should also always have an emergency fund stashed away in the amount of 3-6 months of your income before tackling your student loans. It’s tough to get to work if your car breaks down and you haven’t put any money away to fix it.

The more you can bolster your required payment the better. The key here is to allocate as much as you can, without depriving your life of all joy and meaning. It’s OK to eat out now and then, but picking up restaurant tabs five or six times a week is a step backward financially. And that two-month-long African safari? Put that one on hold. If you’re having trouble establishing a balanced budget, consider calling up a nonprofit credit counseling agency for some free advice on how to make ends meet.

There are several good arguments for choosing to pay down debt rather than investing. You might come out ahead if your debt carries a relatively high interest rate, and it would look good on your credit score, a number that can be very important if you want to borrow money in the future, such as for a mortgage or a car loan. Having a low credit score can mean paying higher interest rates if you can get a loan at all. Your credit score can even affect other aspects of your life, such as the premiums you’ll pay for insurance, whether a landlord will rent to you and even whether an employer will hire you.

Personal finance is personal. What works for someone else might not be best for you, because your goals may differ.  High student loan payments can also limit your ability to take on new debt. In that case, if homeownership is your primary goal, you might focus on paying down your student loans so you can more easily qualify for a mortgage.

There’s no one right answer when it comes to whether you should prioritize paying off student loans or investing. There are both monetary and psychological aspects that will likely factor into your decision. Weigh your options in regard to your own financial situation, think about what you’re comfortable with, and consider speaking with a trusted advisor if you need further assistance.