There's a simple rule to determine whether investing while paying off student loan debt is a smart move, according to the experts
Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, but our reporting and recommendations are always independent and objective.
- Should you delay investing until you pay off your student loan debt? It depends.
- Erin Lowry talked to the experts for her new book "Broke Millennial Takes on Investing," and they said if your student loan debt interest rate is high, you should pay it off before investing.
- One expert offered a guidepost: A well-diversified investment portfolio should have a 6% annual return, meaning any student loan debt with interest higher than 7% should be paid off first.
- All experts told Lowry that, regardless of student loan debt, you should still take advantage of an employer-matched retirement account if you have the option.
- Visit BusinessInsider.com for more stories.
Student loan debt is at an all-time high - the national total student debt is over $1.5 trillion and the average student loan debt per graduating student in 2018 who took out loans is $29,800, according to Student Loan Hero.
The weight of student loan debt has made it harder for millennials to save money to the point where some are playing catch-up - but the first rule of building wealth is that the earlier you start saving the better, thanks to compound interest.
So should millennials still invest while they have student loan debt - or should they pay it off first? It depends.
A 6% annual return on an investment portfolio serves as a benchmark, says one expert
If the interest rate for your student loan debt is high, experts say you should pay it off before investing, wrote Erin Lowry, founder of BrokeMillennial.com in her book, "Broke Millennial Takes on Investing: A Beginner's Guide to Leveling Up Your Money."
While there isn't a specific interest rate the industry agrees on, Sallie Krawcheck, CEO of Ellevest, told Lowry there's a good guidepost to follow - a well-diversified investment portfolio should return about 6% annually, she said. Based on that, any student loan debt with interest higher than 7% should be paid off first, she said.
How much could your savings grow? Find out with this calculator from our partners:
Alex Benke, vice president of Financial Advice and Planning For Betterment, told Lowry that Betterment uses a 5% interest rate as the cut-off for student loan debt. You should have an emergency fund and no high-interest debt before starting to invest, he said.
But if your student loan debt has a low interest rate of less than 5% or 4%, it might be worthwhile to invest while paying it off, Julie Vitra, senior financial advisor with Vanguard Personal Advisor Services, told Lowry. "If you expect your portfolio to earn 6% to 8%, and your student loan debt is at 3%, 4%, or 5%, maybe, you're better off investing your dollars," Vitra said.
Consider the economic climate and company-match programs
Whether you invest while paying off student loan debt also depends on the climate in which you're investing, according to Vitra.
"After the Great Recession, the stock market experienced a bull run from 2009 through 2018, but analysts and experts have been anticipating a market correction and less aggressive returns in the coming years," Lowry wrote. "No one has a crystal ball, of course, but always do your research about recent returns before deciding to invest while paying off debt."
All experts Lowry talked to said that regardless of your student loan debt interest rate, you should invest in an employer-matched retirement account - like a 401(k) - if the option is available.
A company match means your company will match whatever contribution you put towards your 401(k) up to a certain amount.
For example, say your annual salary is $100,000 and your company offers a "one-to-one" match up to 5% - if you contribute 5% of your salary ($5,000), your company will match it by contributing $5,000, making your actual investment $10,000 a year.
Essentially, it's free money. Just keep in mind that the 401(k) contribution limit for 2019 is $19,000, according to the IRA.
Ready to invest? Consider these offers from our partners:
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.