Should I Pay off My Student Loan Debt?

A lot of people think you should always work to eliminate debt. While this is a solid approach for high interest debt, paying off low interest student loan debt could significantly slow your portfolio’s growth. I decided not to pay off my student loans, and invested instead.  While investing was a better choice for me, some of us are more risk averse, and we each need to find the right balance for ourselves. Before we make any decisions, it’s important to compare the numbers and consider the risks.

You may have heard of the concept of homo economicus, a simplified economic model of us humans. It assumes that people behave in a rational way, always looking out for self-interest by making the most optimal financial decisions. But we’re a bit more complicated than that.

In reality, I feel like I fall between two diametrically opposing models. Let’s call them homo Chickenus, and homo Sharkinus. Sharkinus is a lot like homo economicus, it’s always trying to maximize value, and doesn’t mind taking on risk. Chickenus on the other hand, wants to make decisions based on emotion, and is also much more risk averse.

Some of us are born with a little more Sharkinus (like Mrs CK), and some have a little more Chickenus (like me). We all have varying appetites for risk, but we can usually bring Chickenus and Sharkinus into closer agreement by analyzing risks and potential returns.

The utility of debt

As horrible as some people think debt is, it can be a useful tool. We expect companies to retain a healthy amount of debt, because they use loans to buy more equipment, hire more workers, and earn more profits. By growing and commanding more market share, these companies become more valuable with debt than without it.

This can hold true on an individual level. I paid a good portion of my way through college working as a landscaper, but I also had to take on debt. After graduating, I had approximately $16k in student loans. But I was also equipped with new skills that allowed me to make more money than I did landscaping.

If we’re using it as a tool for increasing value, Sharkinus has no problem taking on debt. Chickenus on the other hand, isn’t happy with the monthly payments.

Is there value to paying off student loan debt?

Once I graduated, I started getting some decent paychecks. After paying the bills, I had some extra cash to pay off student loan debt or invest. Right off the bat my Chickenus and Sharkinus were in disagreement.

Sharkinus points to the business aspect, “We should invest the money for larger returns, and maybe even take a bite out of some more debt to keep growing!” Meanwhile Chickenus is getting stressed out. “But we’re in debt! What if we lose the job and still owe money?”

They both have good points, but before letting either of them run wild, it’s worth running the numbers.

Is your student loan tax deductible?

Before you decide whether to pay off student loan debt or invest, it’s important to know what your student loan is costing you. The effective interest rate might be a bit lower if it’s tax deductible.

At the time of writing this article, the IRS allows student loan interest deductions up to $2,500. This deduction is only available for certain income ranges, and you can check with the IRS website to see if you qualify.

If you do qualify for a deduction, this could mean paying 10-20% less than if you had to pay with after tax money. The effective rate you pay on your loan would be reduced by the same amount. We want to account for that when comparing investment returns with your loan’s interest rates.

Can you refinance?

The lower the interest rate on a loan, the less we get out of paying it off. When I first graduated from school, the interest rate on my loan was 3.5%. After making my payments on time for 2 years, I was able to refinance my loan at 1.6%.

Looking into refinancing is the first thing you should do. I have a few friends who had good luck getting significant reductions in their rates by refinancing with SOFI.

Checking to see if you can get a better rate is one thing that both Chickenus and Sharkinus agree on.

Don’t forget, inflation is working for you

While Chickenus is always thinking about how debt is bad, Sharkinus is thinking about how low interest debt can increase value. “Consider a student loan charging 1% interest. With inflation at around 2%, we’d be coming out ahead 1% each year, just by only paying the interest!”

Of course, to really come out ahead, you also have to invest the money that would otherwise have gone toward paying off the student loan debt. And those investments need to return more than what your debt is costing.

What kind of returns could you get instead?

If you just wanted to beat inflation, you could invest in TIPS (Treasury Inflation Protected Securities.) These bonds track inflation, and are pretty much guaranteed returns since they’re backed by the US government. In the case that a student loan is less than 2%, it might be better to invest in TIPS.

Chickenus does like the idea of guaranteed returns. “Maybe we can invest in government bonds over paying off super low interest student loans.” But Sharkinus still isn’t happy. “That’s a start, but we can get even better returns in the stock market.”

When it comes to stock and bond investments, we use a 4% rule to determine safe withdrawal rates for early retirement. This tells how much we can expect a portfolio to provide us based on historical worst case scenarios. But the studies behind the 4% rule use real returns, meaning that inflation is already accounted for. This is so that you can increase your withdrawals each year with inflation to maintain a standard of living.

If we weren’t accounting for inflation, we could expect investment returns closer to 6% based on historical worst case scenarios. And if we look at the averages, the stock market has returned closer to 10% throughout history. I invest in basic index funds, and at the time of writing this article, the Total Stock Market Index Fund has a 10 year return of 7.7%.

Sharkinus would be quick to remind us, “If you invested 10 years ago, it would have been right before the massive stock market crash of 2008… And even with that terrible timing, you would have earned 7.7% on average 10 years later!”

So should I pay off my student loan?

Well, even Chickenus is now OK with keeping the super low interest student loans, let’s say below 2%, because there are options for guaranteed greater returns. Sharkinus however, wants to invest the money before paying anything less than 6%, and still wants to take on even more debt. “We’ve run the numbers, you’re pretty much guaranteed to make more money in the stock market over the long haul.”

Even though I’ve looked at the numbers myself, 6% is sounding like a pretty high interest rate. I get that Sharkinus wants to clear extra profits, but I’m not sure it’s worth the extra risk. And even for a growing company, there is a limit to what is considered a healthy amount of debt.  On the other hand, I do think Chickenus might be costing us some money by being a little too, umm… chicken.

Can you make pre-tax contributions to a retirement account?

Many of us have the option of investing in pre-tax retirement accounts like the 401k. Depending on your tax bracket, investing in a pre-tax retirement account can mean saving 20-30% on taxes you would have paid on the contributions.  And if you plan on retiring early, you may never have to pay those taxes. That’s an enormous advantage to investing that you get right off the bat.

Both Sharkinus and Chickenus can agree on paying less taxes than we need to.

Consider investing while paying down student loan debt

While Sharkinus would like to have a portfolio allocation of 100% stocks, a lot of us still appease Chickenus by keeping some portion of bonds. That way, we can still get good returns, and Chickenus will let us sleep at night. We can do a similar split with our student loan repayments.

If you normally invest 75% stocks and 25% bonds, you could consider continuing investing 75% in stocks, and then put the 25% towards debt rather than bonds. The Total Bond Market index fund is only returning 2.3% at the time of this article. And it’s more important to have time in the market with your stock investments.

Fighting the temptation to pay off student loans

Even though I already quit my job, I still have student loan debt. The rate is 1.6%, and I just checked my balance – I owe $1,500.

While all the beasts in my head agree this is student loan debt worth keeping, Chickenus is still really tempted to just pay it off. Mostly because it would feel so good to eliminate the payments. But we all came to an agreement years ago, and it’s been working out well. My portfolio has doubled in value since I started investing, making me about $15k richer than if I had paid off my student loan.

My decision was pretty easy though. Paying off a student loan with such a low rate was something everyone could get on board with. If you still have debt in the 2-6% range, you should figure out how to appease your own Sharkinus and Chickenus.

You don’t want to side 100% with Sharkinus if you might be swayed by Chickenus to sell stocks when the market tanks. That’s why it’s important to pick a strategy and stick with it. The best answer is probably going to be somewhere in between what our Sharkinus and Chickenus want us to do.

30 thoughts on “Should I Pay off My Student Loan Debt?

  1. I am such a chicken because my focus has been more on debt payoff over investing. For our family, we like the security that comes with debt freedom. That might mean working a little longer to make up for the gains, but we don’t want to go into retirement with any debt whatsoever. I’d hate to still owe on my mortgage while retired and then have the economy tank, leaving me potentially without a home.

    • Knowing ourselves and our own risk tolerance is very important when it comes to investing. The stock market can be a roller coaster, and we should only invest if we plan on sticking with our plan.

      That said, I think everyone should invest at least a little, especially in tax advantaged accounts like Jonathan mentions below. It’s better to take risks when we are younger and can recover and learn from our mistakes.

      I really learned a lot about my own Chickenus when he went wild during the last market crash.. While it cost me a few dollars, the lesson in investing was invaluable 🙂

  2. 1.6%. That’s amazing. With a rate that low I would ride the debt out until I was financially independent. I have a feeling I won’t be in that position. My rate currently ranges between 5% and 8%. I am also taking on more debt as a first year medical student and when I begin paying them off I will be push out of any deductions available. So my plan is to pay them off as fast as possible and to refinance once I finish school.

    • Yeah, I was lucky to be able to refinance to such a low rate. It made my decision to keep the student loans pretty easy. Especially since I had a low monthly payment.

      You have the right plan to try refinancing when you’re done, and then paying off any high interest portions left. Most people I know, including myself, were able to get 25-50% reductions in their rates.

      Here’s to hoping for good rates when you finish school! Good luck, and Cheers!

  3. We were in a similar boat debating paying off my loans or investing instead.

    Mrs. SSC is more Chickenus and wanted the debt gone, and I was more Sharkinus and wanted to ride the 2.25% interest rate for as long as we could. We ultimately did both, investing AND paying off the loans early.
    Her point was more related to the freedom of not having a $300+bill every month, so that if our lifestyle changed or we got laid off, it’s one less thing to worry about. I guess ultimately it also comes down to what helps you sleep at night. For Mrs. SSC, it was NOT having that loan hanging over us. For me, it was knowing Mrs. SSC is sleeping well, lol.

    • Hah, an excellent point! For those of us who are married, we also need to make sure our partners too sleep well at night 🙂

      I think doing a combination of investing while paying down debt is going to be the best bet for most.

  4. This is especially true regarding the tax savings of tax deferred accounts like 401ks or IRA s. Take the tax savings t hen pay off student debt. In the last year of paying off debt, we stopped our 401k contributions ( no employers match, so chill) and we had about $5000 extra in tax liability that year. Was the peace of mind worth that $5000 premium ( plus opportunity cost of investment is debt)??…. In our case yes! But definitely something to consider!

    • A very good point about the tax deferred accounts that I forgot to point out! Thanks for the reminder, I added in there now 🙂

      I am surprised that you went with paying the debt down knowing you would have a $5k tax penalty. But we all have our own goals with personal finance. The important part is to understand our costs and risks, which it sounds like you do 🙂


      • Thanks! Yeah, it stunk to take the hit, but it is awesome to be done with that debt! Also, even though we refinanced we didn’t get that awesome than lower than inflation interest rate! Nicely done.

  5. It’s only $1,500 – pay it off! Then it won’t take up space in your brain. I started slowing down my student loan debt repayments when I discovered FIRE and instead put the extra cash to investments. A little over a year ago, my last remaining loans was about $4,000. I was sick of looking at it, so I just paid it off even though the interest rate was about 3%. I don’t regret it one bit.

    • Haha, there’s something to clearing your mind! I definitely thought about it when I checked my balance. But I also still have a mortgage at 4%. If I put the $1500 toward that instead, then I save $36/year more.

      That’s two cases of beer. Besides, I have automated payments setup. I rarely notice it, and I’ll have a party when it’s paid off in another year or so 🙂

  6. Not a fan of debt. I get how the math works for keeping debt but emotion and passion is a real thing. When my wife and I got married we had 34k in debt that we decided to eliminate. Our dedication to paying everything off as fast as possible would not have happened if we would have been investing. You can see the end in sight with debt that drives you to sprint towards the finish. Investing for 30 years from now doesn’t inspire that.

    Or maybe we are just some chicken 😉

    • I can’t say I like debt either as I have a good bit of Chickenus in me. But I’m trying to discipline myself more to follow what the numbers tell me. Of course, it doesn’t always work out that way 🙂

      Paying off $34k in debt is nothing to sneeze at. Being debt free is a wonderful thing!

  7. I think it depends on the amount of debt and the interest charged on that debt. Tuition is outpacing the GDP by a long mile. So kids today are leaving school with more debt at higher interest, a lot of cases more than a home mortgage. The battle between rooster and shark is starting to get nasty!

  8. Have to confess. Mr. and Mrs. PIE graduated with three degrees from our time living and growing up in the U.K. We never had student loans! But with two kids now growing up and US college fees very much on our mind, yep, we started saving 10 years ago when first kid was born to at least help our kids avoid sizeable student loans in the future. We will see how that grand plan actually works out…..!!

    The whole “sleep well” mentality is powerful and that lizard style of our brain takes over. We bought a second home, that we plan to move to in less than 8 months, and paid it off within two years of purchase. The thought of two mortgage payments, albeit within our budget, just did not sit well. So we took the approach of paying it off. Still, the funds we have had at our disposal to invest since then have benefited from the continued bull market. So timing pays a role in all of this also. But realistically. I completely see the power of NOT paying off a low interest loan as being the smart financial move. Maybe not the smart SLEEP WELL move.

    • Well done! Mrs CK hasn’t paid for any of her degrees either. Avoiding student loans in the first place is certainly the best option 🙂

      Having larger payments, or two mortgage payments, is certainly going to have an effect. My $100 a month payment wasn’t too difficult to stomach. We do need to sleep at night, and while the market has been doing awesome, it isn’t always so kind to us.

      We’re still toying around with paying off our mortgage, but I’ll save that for another post 🙂

      Good luck with the move!

  9. Oh wow…that’s a heck of an interest rate for a student loan! I agree with you that I probably would not pay it off at that rate, and that’s coming from someone who is a huge Chickenus.

    The age old debate of personal psychology vs. finance math has always been an interesting one. When I decided to pay off the debts I tried to create a hybrid Chickenus/Sharkinus plan (other than refinancing). My basic strategy was instead of applying extra payments towards the debt, to put that extra money in an investment account and try to make it grow as much as possible. At the end of the day you will either have an investment account with a considerable amount in it, or a paid off debt. I always thought of it as an almost win/win either direction you go.

    • Hey Danny!

      I think a hybrid Chickenus/Sharkinus plan is going to work best for most. And like you said, whether you pay off debt or invest, it’s a win/win. At this point it’s just about optimizations, there is no losing choice 🙂


  10. I’m in a similar situation where I need to look at the benefits of paying off my mortgage vs keeping it for the ability to itemize my taxes. I need to find the point where the mortgage is no longer valuable to me for tax purposes.

  11. Mr. CK,
    You made a great point. Sometimes having a debt is not bad at all, as the money will be used to invest and get better returns. Unfortunately I’m one of those people who don’t have stomach for debt. I pushed myself so hard to pay off the mortgage, in order to sleep better. I know it was not the best approach. Thanks a lot for sharing. As always, I like your sketches, so cool. – Helen

  12. Hi Mr CK,

    My take is that it is more prudent to eliminate the debts first and not to take new debts. I will sleep soundly in the night without any worry.


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