Investing

Invest or Payoff Loan?

  • Last Updated:
  • Jan 13th, 2018 12:25 pm
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[OP]
Newbie
Jan 11, 2018
2 posts

Invest or Payoff Loan?

Hello everyone!

This is my first post so I hope I'm not asking something too out of the ordinary. I have sort of a "good problem" that I'd love to get some advice on from some of the more finance savvy folks here.

I have recently graduated from university and have accumulated quite a bit of debt. I have also gained access to some trust funds and now have some money to spend. So now I'm wondering whether I should pay off a portion of the debt with my new found riches or should I invest the money?

Thanks!
12 replies
Penalty Box
User avatar
Jul 11, 2008
4368 posts
1465 upvotes
Away from RFD idiots
If it's like a million dollars and your loan is like 40k. It doesn't really matter what you do with it, does it? Pay off or not , it's negligible.
Delete account because there are way too many idiots on rfd
Jr. Member
Oct 31, 2014
176 posts
53 upvotes
Edmonton, AB
Also if you run a business or work for yourself can you write off some of that interested in taxes?
Deal Addict
Jan 3, 2013
1838 posts
142 upvotes
Sidney
Also depends on the interest on the loan. If its like 4 or 5% and you feel like you can beat it, then by all means invest. If its higher, you might be better served paying it off.
Deal Fanatic
Mar 24, 2008
5464 posts
1490 upvotes
Toronto
I'd personally split it in the middle and do both. Any interest you pay on your student loans is a tax credit that helps lower the loan cost a little bit and it's always a good idea to start investing early. Good luck!
Illegitimi non carborundum
Deal Addict
Nov 22, 2015
2873 posts
1671 upvotes
YoungGunWithAQuickFuse wrote:
Jan 12th, 2018 9:49 pm
Hello everyone!

This is my first post so I hope I'm not asking something too out of the ordinary. I have sort of a "good problem" that I'd love to get some advice on from some of the more finance savvy folks here.

I have recently graduated from university and have accumulated quite a bit of debt. I have also gained access to some trust funds and now have some money to spend. So now I'm wondering whether I should pay off a portion of the debt with my new found riches or should I invest the money?

Thanks!
It's hard to give any advice without knowing the amounts. It sounds like your trust fund is smaller than your outstanding student loans?

IMO just pay off all your debts if you can... Then start investing with your income.
Sr. Member
User avatar
Mar 17, 2005
993 posts
45 upvotes
Mississauga
favelle75 wrote:
Jan 13th, 2018 1:46 am
Also depends on the interest on the loan. If its like 4 or 5% and you feel like you can beat it, then by all means invest. If its higher, you might be better served paying it off.
Agreed... but beat it after tax. Student loan interest can be deducted from taxes. Investment income is of course taxable.
Deal Fanatic
Mar 24, 2008
5464 posts
1490 upvotes
Toronto
daftfunk wrote:
Jan 13th, 2018 7:47 am
Agreed... but beat it after tax. Student loan interest can be deducted from taxes. Investment income is of course taxable.
Student loans interest is a non-refundable tax credit and not a tax deduction. There is a difference and it does not lower your taxes as much as a deduction would. Also, there are restrictions on types of loans that qualify for this credit (personal loans and lines of credit don't qualify).
Illegitimi non carborundum
Sr. Member
User avatar
Mar 17, 2005
993 posts
45 upvotes
Mississauga
Yeah it doesnt reduce taxable income if that's what you're trying to clarify. Either way you have to beat it after tax.
Deal Fanatic
Mar 24, 2008
5464 posts
1490 upvotes
Toronto
daftfunk wrote:
Jan 13th, 2018 9:08 am
Yeah it doesnt reduce taxable income if that's what you're trying to clarify. Either way you have to beat it after tax.
Yeah, I wasn't trying to correct you, just adding on to what you said. On a different note, it would seem like people ignore the concept of risk adjusted returns when making such comparisons. For example, investing would have to return much more than the student loan cost (adjusting for tax credit) because it is inherently more risky.
Illegitimi non carborundum
Deal Addict
Dec 28, 2008
1342 posts
129 upvotes
Toronto
I started building up an investment portfolio and cash emergency fund when I first graduated. Once that grew it a decent size after three years I started paying off my debt so that I could free up my cash flow and have a "cleaner" mortgage application.

In hindsight it was a great move given my portfolio was returning 5-15% per year and the weighted, after-tax cost of my student debt was around 2%. However, there is no way I could have known this ax-ante, but it fit my risk profile. For example, I would sleep better at night with 20K in savings and 20K in low-interest debt than have neither.
[OP]
Newbie
Jan 11, 2018
2 posts
Thanks for all the great advice. For those wondering, my student loan is far greater than the money I recently received. If I spent all the newly acquired my money on the loan itself, it wouldn't even half the loan :(

That being said, the current interest rate on my loan is 5.7% floating. I definitely want to invest some of my money, so I think I will set aside about 10% of the extra money I got and invest it into a mutual fund, and use the rest to payoff the loan. Being a bit cash strapped, I don't think I'll be able to stomach the risk of potentially losing money by investing all of the money, let alone earning more than the interest on my loan.

Still open to more advice, however :)
Newbie
Jul 14, 2008
40 posts
10 upvotes
OP I'd recommend putting any extra money you have against that floating rate loan. Given that interest rates are expected to increase over the next two years and that the interest you're paying isn't likely income tax deductible (only a tax credit), it will be difficult to beat the guaranteed rate of return you're effectively earning by paying down your debt.

Valuations in the stock market are high (which is just about the only place you might earn a higher rate of return) and it sounds like you don't have the consistent cash flow to make additional purchases if the market goes down.

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