Ep. 37: Pay Student Loans or Invest?

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. With the Coronavirus epidemic, still, a concern to most individuals or at least is affecting lives across the country, it’s hard to find any real positive to this situation. However, those professionals out there you have an established career going and also have to changes to their income stream and cash-flow and still have student loan debt, there is then one silver lining and that’s temporary zero percent interest rates on their student loans. As part of the financial relief during the epidemic, interest rates on most federal student loans have been temporarily lowered to 0%. Which is a small victory for those who still have a large balance in student loan debt. It’s like when you’re fighting the bad guys and they have a shield up, and then shield goes down so the hits that you land are now stronger and doing something. That’s what I equate this too.

Let’s say for example if you have $50,000 in student loan debt, and your rate is approximately 6% interest. That means that every year you wait, or do nothing, then approximately another $3,000 in interest is tacked on top of the amount that you owe. So a year later you owe $53,000. And in simple terms, if you are only paying a small amount a month, say less than 200 dollars in a year this may be going towards just covering the accrued interest and not eating away at the principal at all.

So with the interest freeze that has taken place now any money you put in goes toward the principal you owe. So instead of the example that was just used. That small dollar amount is now actively lowering how much you owe – so your principal the next year would be $47,000 if the interest rates continued to be kept at zero. Etc… So your money is working way harder for you in paying down your student debt instead of you just paying interest on debt owed.

This interest rate freeze is set to expire on September 30, 2020, but no politician wants to get the blame for raising student loan interest rates a month before an election. The current break in the interest rates was the result of the CARES Act. However, bipartisan legislation isn’t necessary for the 0% interest to continue. President Trump could extend the interest rate freeze beyond the current deadline by playing the executive order card. Though Trump doesn’t have an established track record of helping student loan borrowers, it is worth noting that on March 13th, just before the CARES Act was passed, Trump signed an executive order that was to waive student loan interest “until further notice.” In other words, the people who will be fighting for votes in November have all shown a willingness to halt student loan interest payments. Furthermore, the interest rate freeze has been very popular with student loan borrowers and received almost no criticism.

I believe the odds are pretty good that the interest rate break will be extended into 2021.

Projecting what will happen with federal student loan interest rates beyond the election is going to be up in the air with all that’s going on. 

I don’t like debt. The way my mind works and mental accounting I try to make it a priority to not have any on my balance sheet. Now I understand that not all debt is bad and that at some point if I do decide to purchase a home then yes I will be carrying a mortgage and I’m ok with that. But for those of you who are watching that have a considerable amount of federal student loans debt, I would take the time to sit down, take a good look at your cash-flow and if at all possible find ways to allocate more dollars to pay your loans off while these interest rates are frozen because this isn’t going to continue forever.

If you need help deciding on whether you should be paying off debts, investing, or saving and feel you could use some guidance then give me a call or shoot me an email as I’m here to help. Thank you for watching and as always, thank you for giving your finances the attention that they deserve!