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Should I Pay Off Student Loans or Invest Extra Money?

You fell into extra money. Great! Now, what should you do with it?

Justin Cupler

Contributing Writer at Tally

October 8, 2021

Whether it’s finding a $20 between the couch cushions or being rewarded with a raise at work, it feels awesome to come across unexpected cash.

With a sudden windfall, it can be tempting to splurge on something you want. But remember to pay yourself first, whether by paying off debt or investing for retirement. 

If you have student loan debt and some extra cash on hand, you may wonder if you should pay off student loans or invest. Below, we'll analyze both situations to help you determine the best option for you. 

Benefits of investing your extra money

When you have extra cash lying around or find a way to increase your surplus income each month, you can choose to invest it. Here are some of the benefits of making that decision. 

Potential return on investment

You’ll earn compounding interest when you put extra money in an interest-bearing savings account, but it’s not the same as investing. In investing, you have the opportunity for that cash to grow by selling an investment after its value has increased, then buying another investment with the gains from that sale and letting the new investment grow. 

You can repeat this process until your money has grown well beyond the initial investment. With the right investment advice, you may net significant returns. On average, the stock market earns a 10% return on investment per year

This growth, theoretically, can continue as long as you invest wisely.

Let’s say you have an extra $25,000, and you’re trying to decide if you should use the money to invest or to pay off your $25,000 student loan.

If you were to invest $25,000 for 10 years, the same repayment time frame as most federal student loans, and earned a 10% annual return, your account would be worth $67,676.

How does this stack up against using the money to pay off your student loan? According to the EdFinancial calculator, the monthly minimum payment on a $25,000 student loan would be $242.92. If you were to pay off your loan and invest that monthly payment for 10 years, your investment account value would be $51,194 if you earned a 10% return. That’s $16,482 less than you would have earned by investing the whole $25,000 upfront.


Sometimes, we make a financial move like investing, but a financial emergency strikes where we could really use that extra cash. 

For example, say you get a $25,000 windfall and put it toward your student loans. Then, your car needs $1,000 in repairs the following week. That money you used to pay your student loans is long gone, so you need to source the cash for the car repair another way, such as from an emergency fund or by putting the expense on a credit card.

If you had invested that cash in the stock market or another fund with penalty-free withdrawals, you could liquidate $1,000 worth of assets from that account to cover the emergency. 

Growing net worth

As you get older, your net worth becomes a greater factor, especially when looking to finance a large item, like a home. A potential lender will consider your assets, including investments, when deciding to approve or reject your loan application. 

The more cash you have in investments, the more assets you can show the bank and the more likely the bank is to approve your loan. Before you make any investment decisions, it’s important to speak with your financial advisor to determine if the risk is the right fit for you. 

Benefits of paying your student loans with the extra money

You could use the extra cash to pay off your student loans, and you'd enjoy plenty of benefits from this too. Here are some of the key benefits of paying off your student loans. 

Guaranteed interest savings

If you have a $25,000 direct subsidized federal student loan as an undergraduate, the current student loan interest rate is 3.73%. Let's say you just graduated college and are on a 10-year repayment plan. In this instance, you'd pay $4,990.40 in interest over the decade-long repayment term, according to the EdFinancial calculator

If you were to use the $25,000 windfall we mentioned earlier to pay off this loan immediately, that's guaranteed savings of $4,990.40. 

Financial freedom

There is something satisfying about paying off debt. That feeling of being financially free isn't easy to duplicate. With no monthly student loan payment, you now have extra cash to do with as you please. For those carrying student loan debt, the relief of paying it all off may be priceless. 

While investing it, as mentioned above, is a wise option, you can also use this extra cash to build an emergency fund, save for a new car, save for a down payment on a house, pay off credit card debt and more.


Pay off student loans or invest: Choosing the best option for you

There is no one-size-fits-all answer to which is better: paying off student loans or investing the extra cash. However, you can determine this on your own with a few tips. 

Consider your student loan terms

Your student loan terms are integral in deciding which path is best for you. At the lowest term of 3.73% interest, the 10-year net interest loss between paying off your student loans and investing is large enough to objectively say that investing extra cash is the best option for your bottom line. 

However, not all student loans have such low interest rates. For example, federal student loans for grad school can be as high as 6.28% interest

If you have private student loans, you could be paying as much as 12.99% interest. With this higher interest rate, you don't need a complex calculator to know you'll save more interest paying off your loans than you'll likely make by investing the extra money. 

Keep in mind that you can refinance private student loans to a lower interest rate too. With current refinance rates topping out at 6.94% interest, refinancing your private student loans and investing the extra cash may be a better alternative than paying them off. 

Private student loan refinancing depends on your credit report and credit score, so you may not always get a significantly lower interest rate. Keep this in mind when considering student loan refinance as an option. 

Look into student loan forgiveness programs

If you're a teacher, work in public service or for a qualifying nonprofit organization, you may qualify for student loan forgiveness. 

As a teacher, if you teach full time at a low-income elementary school, secondary school or educational service agency for five consecutive years, you may qualify for up to $17,500 in student loan forgiveness. 

There’s also the Public Service Loan Forgiveness plan for anyone working for the government in a nonpolitical position or for a qualifying nonprofit. Suppose you do so while participating in a qualifying income-based repayment plan for your student loans. In that case, you may be eligible for full forgiveness of your student loan balance after making 120 payments.

The savings a student loan forgiveness plan offers can make investing the extra money even more attractive. 

Consider your stock market savviness

Do you have a proven track record of great success in the stock market — or does the investment professional you work with? If so, you may consistently beat the average investment returns, which can further tip the scales to invest the extra cash. 

However, keep in mind that there can be stock market crashes that even the savviest investors can't avoid. While these kinds of dramatic losses aren't common, they are always worth considering. 

Talk to your employer

Some employers offer tuition reimbursement if your degree is related to your job or a job you're pursuing. Check to see if your employer offers this before deciding to pay off your student loans. 

Consider personal finance goals and personality

Finally, consider your financial goals. Things don't always have to be so black and white. Instead, look at how you respond to paying off student loan debt versus building retirement savings. Which one is more satisfying to you? 

If you feel best watching your debt balances fall, which builds intrinsic motivation to continue paying them off, then that should be your focus. 

However, if you’re happy watching your retirement account grow, it may be worthwhile to invest that cash. 

Goals work best when you're most excited by the results. 

Do what's best for you

When it comes to using a windfall to pay off student loans or invest, there is no one answer for every financial situation. Analyze the interest rates of your student loans and the average return on investment to see which makes more sense to your bottom line. But also consider your financial goals and motivations. 

With all these variables analyzed, you'll be better prepared to choose the right path for you. 

If you're struggling with credit card debt on top of your student loan debt, the Tally† credit card debt repayment app can help. This app rolls all your credit card payments into just one monthly payment. Plus, it offers a lower-interest personal line of credit. This allows you to efficiently pay off higher-interest credit cards and save money along the way. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.