Should I invest or repay a student loan debt?



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Student debt is at its highest historic level: the total national student debt is over $ 1.5 trillion and the average student loan debt of a graduate student in 2018 who has taken out a loan is $ 1.5 billion. raises to $ 29,800, according to Student Loan Hero.

The debt burden of student loans has made saving money harder for millennia, but some are struggling to catch up. The first rule of wealth accumulation is that the sooner you start saving, the more you save, thanks to compound interest.

Should millennials continue to invest while they have student debts – or should they repay their debts first? It depends.

Expert says 6% annual return on investment portfolio serves as benchmark

If the interest rate on your student debt is high, experts say you should pay it back before investing, wrote Erin Lowry, founder of BrokeMillennial.com in her book, "Broke Millennial is embarking on the investment: a guide for beginners to increase the level of your money ". "

Sallie Krawcheck, CEO of Ellevest, told Lowry that a good guide to follow: a well-diversified portfolio should generate an annual return of about 6%, she said. On that basis, any student loan debt with interest above 7% should be repaid first, she said.

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Alex Benke, Vice President, Financial Advice and Planning for Betterment, told Lowry that Betterment was using a 5% interest rate as the limit for student loan debt. You should have an emergency fund and no high interest rate debt before you start investing, he said.

But if your student debt has a low interest rate of less than 5% or 4%, it may be worthwhile to invest while repaying it, said Julie Vitra, senior financial advisor at Vanguard Personal Advisor Services, in Lowry. "If you expect your portfolio to earn between 6% and 8% and your student debt to be 3%, 4% or 5%, you may be better off investing your dollars. "Vitra said.

Consider the economic climate and business twinning programs

According to Vitra, investing while paying off a student loan debt also depends on the climate in which you invest.

"After the Great Recession, the stock market had a bullish period from 2009 to 2018, but analysts and experts anticipated a market correction and less aggressive returns in the coming years," Lowry wrote. "Nobody has a crystal ball, of course, but always do your research on recent returns before deciding to invest while paying off your debts."

All the experts that Lowry talked about said that, whatever the interest rate on your student debt, you should invest in an equivalent retirement account, such as a 401 (k) account, if that option is available.

A corporate match means that your company will match the contribution you make to your 401 (k) up to a certain amount.

For example, suppose your annual salary is $ 100,000 and your company offers an "individual" equalization of up to 5%. If you pay 5% of your salary ($ 5,000), your company will pay an equivalent contribution of $ 5,000. real investment $ 10,000 a year.

Essentially, it is free money. Just keep in mind that the 401 (k) contribution limit for 2019 is $ 19,000, according to the IRA.

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