{"id":202229,"date":"2015-10-21T04:00:28","date_gmt":"2015-10-21T11:00:28","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=202229"},"modified":"2020-02-23T00:24:35","modified_gmt":"2020-02-23T08:24:35","slug":"pay-off-student-loans-or-invest-how-to-move-toward-funding-retirement","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/pay-off-student-loans-or-invest-how-to-move-toward-funding-retirement\/","title":{"rendered":"Pay off student loans or invest — how to move toward funding retirement"},"content":{"rendered":"

In my recent post, “Why investing can be better than paying down debt,”<\/em> Dianecy’s comment<\/a> raised a question faced by many: What do you do about investing when you have student loans?<\/strong><\/p>\n

It is quite the dilemma, actually, because the best time to start funding your retirement is when you’re still in your 20s. And as anyone who has been reading Get Rich Slowly for more than, say, 10 seconds would know, few things impede your progress toward getting rich (at any speed) like debt.<\/p>\n

The reason is simple: A dollar can be spent only once — either for another person’s benefit or for yours. So it follows that repaying debt benefits the bank; investing those same dollars in a CD or index fund, on the other hand, benefits you and your future.<\/p>\n

Therefore, debt avoidance<\/strong><\/em> is always the best strategy. It may not always be easy, but it is almost always possible. Many have figured out how to get an education without incurring student debt. I managed to fund my bachelor’s, master’s and doctoral programs without getting into debt. It’s like the old maxim: “Where there is a will, there is a way.”<\/p>\n

<\/span>Not inevitable, but a big problem nonetheless<\/span><\/h2>\n

So student debt, therefore, is not inevitable. However, not everyone gets the memo in time, and you may find yourself with some student loans. You are not alone. This New York Fed chart shows the meteoric rise of student debt in the U.S. and how it now dwarfs other forms of debt:<\/p>\n

\"student<\/a><\/p>\n

You can see how student debt went from the smallest category of non-mortgage consumer debt to the largest — in less than 10 years. But the size of the problem isn’t the only issue. Concern at a national level over student debt cutting economic growth off at the knees prompted the study from which that chart is taken.<\/p>\n

<\/span>How student debt strangles the economy<\/span><\/h2>\n

It is somewhat of a chicken-and-egg situation: Student debt payments put a drag on young people’s ability to strike out on their own and buy their own homes — two of the prime factors that drive any economy.<\/p>\n

This hampering of household formation (in economics-speak) makes for a slow recovery, in turn creating a vicious cycle of low growth which means fewer opportunities, prompting more people to get a degree in order to do better in a weak economy. That, of course, adds to student debt, and the vicious cycle continues.<\/p>\n

<\/span>Moving forward despite the difficulties<\/span><\/h2>\n

What’s true from 30,000 feet is true on the ground: Paying back student debt can put a crimp in anyone’s ability to get on their feet and move ahead financially.<\/p>\n

There are two reasons student debt is not as easy to dismiss with the blanket pay-all-debt mantra as, for instance, car loans and credit card debt. The first reason is the interest on a student loan is typically lower than all forms of debt save for home mortgages. The second is a little more complex.<\/p>\n

<\/span>Fixed vs. variable cost — the move<\/span><\/h2>\n

If it wasn’t for one single factor, debt could have been a wonderful thing. What factor is that? Inflexibility.<\/strong> When tough times come (and they come to most of us a few times in our lives), you can adapt by cutting your costs. You can move to a cheaper place, even move in with family. You can eat for less, stop buying new clothes, drive less, and so forth.<\/p>\n

The one thing you can’t cut, though, is debt payments. That’s the problem, and it gets worse when you live a lifestyle which leaves little margin for error. Accountants call those inflexible payments “fixed costs” — costs you can’t change when things go bad. The costs you can<\/em> change (food, gas, clothing,etc.) are called “variable costs.”<\/p>\n

Your ability to ride out bad times improves, therefore, when you have few or no fixed costs. Now, if you were able to convert a fixed monthly payment into a variable payment, the greatest risk of that debt would be mostly mitigated.<\/p>\n

And with most student debt, you do have that option.<\/strong> According to the Federal Student Aid office of the U.S. Department of Education, most student loans are eligible for one of the following three types of income-driven repayment plans:<\/p>\n