What Comes First? Student-Loan Payoff or Investment

College is often thought of as some of the best years of your life. And for good reason. From the academic experience to the recreational activities and, of course, the long-term career benefits, a four-year degree is undoubtedly very valuable.

Unfortunately, that once-in-a-lifetime experience often comes with a hefty price tag. In 2022, the average cost of a four-year college degree is $122,000. To pay for this, 70% of Americans take out student loans. Today, one in eight Americans have student-loan debt, with a staggering total of $1.74 trillion nationwide.

On the individual level, the average student loan-holder carries a balance of $38,792 with an interest rate of around 5.8%. Taking on a loan of that size in your late teens or early 20s is a daunting prospect, and many will not realize the weight of their debt until they graduate and have to begin making payments.

On average, it takes most people about 20 to 30 years to pay off their student loans. When you consider statistics like these, it can begin to feel like the financial investment isn’t worth it.

Investing: Start small with investing

Here’s the good news. If you take a focused approach to paying off debt, it doesn’t need to control your life or impede your financial future.

It’s important to begin early and attack the debt aggressively before interest starts to build up, even if it is something small. The monthly strain that debt puts on your budget greatly inhibits your ability to build long-term wealth through savings and investments.

Many young adults think that investing early should be a priority before paying off their student loans. The rationale behind this is that (hopefully) the investment returns will be higher than the interest rate on the loans.

But let me suggest an alternative.

What if student loan holders aggressively paid off student loans, pausing all other financial goals?

It's not uncommon for those following this method to eliminate their student loan debt in just 18 to 24 months—a significantly better plan than making minimum payments and carrying the loan around for 20 to 30 years.

But I thought I could earn more by investing in the long run?

While you probably CAN earn more on your money by investing (in the long run at least), the difference isn’t that much. If you could earn 3% higher by investing (8.8% compared to 5.8%) with an average student loan balance of $38,000, the actual amount earned over 10 years is only about $19,000. That’s before tax without a guaranteed return. 

What are the benefits of paying off early?

• You can be done with it. You can be done with the debt and done with being tied to a required payment.
• You can move on. You can move forward to building wealth and having the freedom to save, spend, invest, and give as you desire.
• You can focus. You can have the single objective of providing for your family, being generous to others, and building wealth.

About 73% of Americans rank their finances as their number one cause of stress. The faster you pay off your debt, the sooner that burden is lifted from your shoulders, and you can focus on more exciting goals.

If this feels like a daunting task, remember, you can always start small. And if needed, you can reach out to an adviser to help assess your situation and help you get started on the path to financial freedom.

Hunter Yarbrough, CPA, CFP, is an executive vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.

Mason Everett, a student of accounting and finance at the University of Mississippi, is a Tennessee native and served as CapWealth’s 2022 summer intern.