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Currently, I use part of my student loan payments to shield against higher taxes. AKA I can write off the interest payments on my tax return. I can then use the

Currently, I use part of my student loan payments to shield against higher taxes. AKA I can write off the interest payments on my tax return. I can then use the money I write off to invest in the stock market, buy groceries, etc. This is better for the economy long term, but also for myself. That's why there have been discussions around the topic, but not much action in the U.S. Here are some issues it would have caused: (a) Reduced my chances of getting an education at a top rate university (because I would be considered "at risk" for not succeeding, at least on paper). So I would have ended up at a less prestigious school, made less money, etc. (b) If I had say 10% of my income siphoned off to a private company (which is a scary thought), I wouldn't have the opportunity to choose how to spend my money. For example, I have chosen to skip paying a loan payment to pay rent. I called and asked if this was alright, they told me it was fine. It kept me from being homeless for a month while I handled a cashflow issue. (c) Because of the tax benefits, I have zero incentive to pay off my loan quicker. If 10% of my income went to some loan agency I'd pay it off quicker than I am now, and thus have less interest to write off. Further, I make money quicker than I lose it due to loan interest on the stock market, so I can actually pay back my loan faster by investing, then paying down the loan. This also helps spur the economy along, and at scale this is a massive reason it's not in anyone's best interest to implement a plan like this.

purplecpa 10y ago
But why spend a dollar to save ten cents? If you paid off your loans quicker the savings in interest will far exceed the savings in tax deductions and depending on your rate of return in the market could even trump those gains.
- dublinben 10y ago
  If your loans are only at 3.5%, but you can earn 7% on the stock market, you're throwing money away by paying over your minimums.
  - JumpCrisscross 10y ago
    > loans are only at 3.5%, but you can earn 7% on the stock market This isn't prudent asset-liability matching. If your loan is 3.5% and you can find investment-grade bonds that (a) yield more and (b) compensate you, in the spread, for your risk and hassle, then that might work.
    - sirakov 10y ago
      These comments are proof we've been in a bull market far too long
      - willholloway 10y ago
        Agreed, and a completely federal reserve fueled one at that. I remember how, with great fanfare, DOW 10,000 was ushered in. I was in 8th grade and it was 1998 or 1999, I remember how ten years later the DOW hit about 6,000. We do not know how capitalism will respond to competent robotics and AI, and a population bust.
  - lettergram 10y ago
    Exactly right! My highest loan is 10% interest (private loan), average between all of them is 5.2%. My annual return on the stock market is always well above 10% YoY... sooo it's basically never worth it. Which is my point, the whole "we'll make you an indentured servant until you pay us back", seems stupid.
    - mywittyname 10y ago
      What happens when another 1999 happens with three straight years of 20-30% declines? Or a 2008 where there's a nearly 40% decline? It takes several years of double digit gains to recover from these declines, and both of those happened within a decade (and we are not even a decade out from 2008). Point is, investing v. paying off debt is not a simple matter of average expected growth compared to interest paid on loans. Investments often lose large portions of their value in the short-term while paying off debt is always a guaranteed return. So, for short loans (<15 years), it's probably not wise to use average expected return, instead use a wide range of +15%pa and -30%pa. I'd argue the fact that you've beaten the average expected yearly return for so long suggests that a correction is imminent and paying off debt has a better expected return than investing. This goes doubly because so many people have forgotten the lessons taught by past recessions and believe that 10%+ annual returns are the norm.
mgkimsal 10y ago
> I wouldn't have the opportunity to choose how to spend my money But you did have a choice. You spent it before you had it, by borrowing from someone else. That was your choice.
hahla 10y ago
Student loan interest is an adjustment ("deduction") to gross income not a credit. 2016 - $2,500 for the year max deduction, so based on your tax rate you can compute how much your real "savings" are. I wouldn't necessarily think of this as a shield against higher taxes.. the amount is marginal based on the tax bracket your in.
- lettergram 10y ago
  Totally agree $2500 isn't much, but when you couple it with the fact I make more money on my investments than I do from paying down my loan (plus interest), it would actually cost me a lot more potential earnings paying down my loan.
- planteen 10y ago
  I thought the same thing. My strategy was just to pay down loans as quickly as possible before putting money in stocks outside of retirement accounts. A flat year in the market doesn't make the OP's strategy worth it, not to mention a decline. Even in a really good year, $2500 isn't a huge amount to offset gains.

purplecpa 10y ago

But why spend a dollar to save ten cents? If you paid off your loans quicker the savings in interest will far exceed the savings in tax deductions and depending on your rate of return in the market could even trump those gains.

dublinben 10y ago
If your loans are only at 3.5%, but you can earn 7% on the stock market, you're throwing money away by paying over your minimums.
- JumpCrisscross 10y ago
  > loans are only at 3.5%, but you can earn 7% on the stock market This isn't prudent asset-liability matching. If your loan is 3.5% and you can find investment-grade bonds that (a) yield more and (b) compensate you, in the spread, for your risk and hassle, then that might work.
  - sirakov 10y ago
    These comments are proof we've been in a bull market far too long
    - willholloway 10y ago
      Agreed, and a completely federal reserve fueled one at that. I remember how, with great fanfare, DOW 10,000 was ushered in. I was in 8th grade and it was 1998 or 1999, I remember how ten years later the DOW hit about 6,000. We do not know how capitalism will respond to competent robotics and AI, and a population bust.
- lettergram 10y ago
  Exactly right! My highest loan is 10% interest (private loan), average between all of them is 5.2%. My annual return on the stock market is always well above 10% YoY... sooo it's basically never worth it. Which is my point, the whole "we'll make you an indentured servant until you pay us back", seems stupid.
  - mywittyname 10y ago
    What happens when another 1999 happens with three straight years of 20-30% declines? Or a 2008 where there's a nearly 40% decline? It takes several years of double digit gains to recover from these declines, and both of those happened within a decade (and we are not even a decade out from 2008). Point is, investing v. paying off debt is not a simple matter of average expected growth compared to interest paid on loans. Investments often lose large portions of their value in the short-term while paying off debt is always a guaranteed return. So, for short loans (<15 years), it's probably not wise to use average expected return, instead use a wide range of +15%pa and -30%pa. I'd argue the fact that you've beaten the average expected yearly return for so long suggests that a correction is imminent and paying off debt has a better expected return than investing. This goes doubly because so many people have forgotten the lessons taught by past recessions and believe that 10%+ annual returns are the norm.

mgkimsal 10y ago

> I wouldn't have the opportunity to choose how to spend my money But you did have a choice. You spent it before you had it, by borrowing from someone else. That was your choice.

hahla 10y ago

Student loan interest is an adjustment ("deduction") to gross income not a credit. 2016 - $2,500 for the year max deduction, so based on your tax rate you can compute how much your real "savings" are. I wouldn't necessarily think of this as a shield against higher taxes.. the amount is marginal based on the tax bracket your in.

lettergram 10y ago
Totally agree $2500 isn't much, but when you couple it with the fact I make more money on my investments than I do from paying down my loan (plus interest), it would actually cost me a lot more potential earnings paying down my loan.
planteen 10y ago
I thought the same thing. My strategy was just to pay down loans as quickly as possible before putting money in stocks outside of retirement accounts. A flat year in the market doesn't make the OP's strategy worth it, not to mention a decline. Even in a really good year, $2500 isn't a huge amount to offset gains.