A graduate with $140,000 in student loan debt and $70,000 saved faces a choice between keeping investments and paying loans. Paying debt is framed as a guaranteed wealth-building move because loan interest rates for graduate students often run around 7% to 9%, while risk-free rates such as the 10-year Treasury yield are lower. Keeping money invested to earn a long-run return involves paying a higher guaranteed loan interest rate while relying on a probabilistic market return. The spread between loan costs and expected investment gains compounds over time, and investing creates the risk of selling during a downturn to make payments. Inflation can reduce the real burden of fixed-rate debt, but the benefit does not depend on delaying repayment.
"The stakes are real. Get the math wrong and you torch tens of thousands of dollars over the loan's life, or you leave yourself one layoff away from selling investments at the worst time to make a payment."
Read at 24/7 Wall St.
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