Should I invest or pay off my debt?
I have around $35,000 in mutual funds, but more than twice that in student loans. Should I use my mutual funds to pay down my loan or should I keep my funds as investments and grow them?
I know many student loans do not need to be paid back immediately or repayment can be based on income limits. Depending on your career, some loans can be forgiven over time and I also know that when you are applying for new jobs, that you can negotiate with some employers to pay off a portion or all of your student loan as a signing bonus as they can receive a tax benefit many times.
With that said, there are many more factors that would need to be discussed in order to determine if paying it off or not would make sense. But in short, If rate is high (8%+) and you are making large or moderate size payments every month. Then I'd probably advise trying to pay off as quickly as you can to reduce your monthly payment or at least refi the loan at much lower rate.
The mathematically right answer to this question is to keep your mutual funds for as long as they produce returns that exceed the rate of interest on your loans, or pay off the loans if the rate is higher. But the best answer is to keep your mutual funds anyway, because (1) You could suddenly lose your job and need funds to live on; (2) you might want to move up in the world and buy something like a house or new car; (3) you or a family might have an emergency that requires cash; etc. If the return on your funds is lower than your loan interest rate then so what? It costs you a couple of percent a year to have flexibility, a financial cushion.
Assuming you have a steady job, you can make student loan payments regularly and after some years be done with them (or pay them off when your investments are a lot bigger than they are today). Good luck.
Greetings and thanks for posting your question. I believe that you are doing the right thing by investing, however don't allow time for 'negative compounding interest' to get the best of you. Begin paying down your student loan debt! I am not going to suggest that you sell your mutual funds to do so, but at least set up a plan to begin reduce your student loan liability. That type of debt can (and will) cause your FICO score to remain somewhat mediocre because the interest on the debt continues to build. The more your debt balance grows, it will have a negative impact on your credit.
I wrote a blog post about "building excellent credit", you can read it here: https://www.answersaboutwealth.com/build-excellent-credit/
Thanks again for your question.
Keep your funds and let them grow! Doing so will allow you to grow your net worth as the value of your investment (hopefully) grows while you are simultaneously drawing down the face value of your student loans. At some point in time, you can reasonably expect the lines to cross so that the investment and outstanding balance of your loans are the same value. Then, depending on your other assets, you might be able to consider cashing in your funds and paying off your loans. Or, if you haven't been able to increase the value of your other investments (including retirement funds) you could continue to allow your funds to grow while you keep paying off your student loan.
But today? There's a good chance that if you sell your funds you'll still have your student loan. Which would be a lousy outcome.
It would be helpful to learn how many years you have left to pay off your student loans. If it's only a couple of years, I'd lean in the direction of using the proceeds from your mutual fund investments to pay them down now. With that said, however, I suspect that you have gains in the funds, which means that the net available, after taxes, will be significantly less than the current value. You need to keep that in mind before going ahead on this route.
On the other hand, if you have three to five years or more, I would be more inclined to let the funds grow. Although the stock market is quite richly valued now and may well have a correction (or two) in the period just ahead, it seems probable that even with a pullback overall prices will be higher by the early part of the next decade.