2 ms·

> There’s nothing inherently better about paying down student debt if the alternative is investing in a broad based equity fund (VTSAX, VTI, etc). it depends o

> There’s nothing inherently better about paying down student debt if the alternative is investing in a broad based equity fund (VTSAX, VTI, etc). it depends on whether you have a subsidized or unsubsidized loan. the interest rate on the unsubsidized stafford loans is only a little less than the average nominal return of the s&p500 over the last ~60 years [0]. the safe bet here is probably just to pay the loan off; you don't know if the next ten years will give above or below average returns. on the other hand, the subsidized stafford loans have only about half the interest of the unsubsidized flavor. if this is you (and you aren't making enough money to lose the subsidy), it seems like there would be a perverse incentive to only pay the minimum and invest whatever is left over. [0] https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp https://www.investopedia.com/ask/answers/042415/what-average...

sokoloff 7y ago
If there's even a 5% chance that the Democrats will give you $50K if you wait, that juices the expected return of not paying off the loan significantly. I agree with you in general that it's economically nearly a push to invest or pay off the loan under normal political conditions, and that the certainty of paying it off has positive value for most people. I also think there's significant psychological benefit to having no student loans hanging over your head, so absent the possible handout, I'd lean towards paying it off. Waiting two or three years to see if the promise evaporates seems reasonable, given the low average cost of waiting.
- leetcrew 7y ago
  I see your point, although I don't think I would recommend this strategy to a good friend. there's also an emotional side to it. even if you made the "optimal" economic decision at the time, it would still feel pretty bad to pay off your loans in full over the first 5-10 years of your careeronly to see your peers' debt get wiped out at the end.
  - sokoloff 7y ago
    “You did such a good job paying off your own loans, we’re sure you’ll enjoy paying off everyone else’s loans as well...!”

sokoloff 7y ago

If there's even a 5% chance that the Democrats will give you $50K if you wait, that juices the expected return of not paying off the loan significantly. I agree with you in general that it's economically nearly a push to invest or pay off the loan under normal political conditions, and that the certainty of paying it off has positive value for most people. I also think there's significant psychological benefit to having no student loans hanging over your head, so absent the possible handout, I'd lean towards paying it off. Waiting two or three years to see if the promise evaporates seems reasonable, given the low average cost of waiting.

leetcrew 7y ago
I see your point, although I don't think I would recommend this strategy to a good friend. there's also an emotional side to it. even if you made the "optimal" economic decision at the time, it would still feel pretty bad to pay off your loans in full over the first 5-10 years of your careeronly to see your peers' debt get wiped out at the end.
- sokoloff 7y ago
  “You did such a good job paying off your own loans, we’re sure you’ll enjoy paying off everyone else’s loans as well...!”