Pay School Loans Or Invest?


Hey, what’s up, John Sonmez here from simpleprogrammer.com. I got a question about paying school loans
or investing. This is a good question. It’s not always so obvious. There’s a lot of details that can determine
whether or not this is—it’s smart to do one thing or the other. He says here, “Hi John, I currently have
$31,000 in student loan debt at 4.57% interest. I have no credit card debt, and no other debt. I’m already maxing out my 401K and I have
over 3 months of living expenses saved up. I have the opportunity o pay my school loans
off by the end of the year. Is this a good idea? If there are any policies that eventually
alleviate school loans, I could miss out on opportunities to invest in a software business
or real estate. Thanks in advance for your input. Best regards, Victor.” Okay, so Victor, just to recap here, he’s
got $31,000 in student loan debt at 4.5% interest. He’s got no credit card debt. He’s maxing out his 401K and all that and
3 months of living expenses saved up. He wants to know if he should pay off the
school loans he could do by the end of the year. The big thing here is this, right, this is
kind of the principle behind this is what you want to do is you want to figure out—you
want to pay off debt—okay, you don’t want to have debt unless that debt is actually
earning you money than its costing you. Let’s say—in this case he’s got an interest
rate of 4.57% I’m assuming per annum, per year on 31,000. We could calculate, I’m not going to do
the calculation now, but you could calculate and you could figure out, “Okay, well, how
much is he paying in interest per year, 4.57%, how much money is that?” Now, if he took that money that he would be
paying to pay those payments—pay that $31,000 if you’re thinking about paying it off. If you took that money and you invested it
somewhere else for a year would it yield higher than 4.57%? Because if it did, just as an “as if”
let’s s ay that you get 10% on that money, well, what you could do is you could invest
that $31,000 that you were going to use to pay off the student loan, get 10% on that
and then take the money that you make on that, that 10%, everything about 4.57% and you could
actually pay down the student loan whatever extra money that you make and still make money
and still be in a good situation. You’re essentially using that 4.57, you’re
going to clear whatever—you’re going to pay interest on the 4.57% of the 31,000 but
you’re going to make interest on what the difference is between that 4.57 and the 10%,
so 5.25%. That’s the key there. The question is can you find an investment
that’s going to earn you a 10% return? I personally think real estate is an investment
that could do that, but are you willing to do that? Is that what you’re wanting to do? If you’re doing it about just investing
it in mutual funds or stock market, you’re not going to get that kind of return. You’re not going to get a guaranteed kind
of return. It’s not going to be enough and you’re
going to pay taxes on it so it doesn’t make sense. I would lean heavily towards paying off the
student loan and getting that cleared out especially now because right now interest
rates in banks are low, you’re not going to make money putting money into the bank. There’s not a lot of places that you could
invest securely that you’re going to guarantee a higher rate than 4.57%. If you think of it this way what you’re
doing when you’re paying off the student loan is you’re essentially earning the 4.57%,
because you’re saving 4.57% in this case. That’s what you want to think about is just
think about it that way. That’s why if you have credit card debt
and you’re—some people say, “Okay, well, save money and solely pay off your credit
card debt.” No, no, no. Don’t save money until you’ve paid off
your credit card debt because you’re paying interest on that. You’ve got to pay off that first. You want to maximize that. If you’ve got multiple—a lot of you have
multiple debts, look at each debt and see what the interest rate is on that. When I was paying off my properties, I have
a lot of real estate, I’ve paid off a lot of those properties. I didn’t just pay off properties randomly. I paid off the higher interest rate ones first
because that makes sense. Some of the properties I’ve actually held
on, even though I had the cash to pay them off, I’ve held on to the loan because if
I’ve got a lot at like 3% I can easily make more than 3% on an investment so I’m going
to do that. So think about it that way. This is kind of—the key thing is that you
want to weigh it against what you could possibly invest in. Now, would you have some kind of opportunity
that might come up where you could invest in some startup or something like that? Possibly, but do you want to take the risk
there? That’s going to be—if you pay off your
student loan you’re guaranteed going to save you 4.57% interest on $31,000. That’s guaranteed what you’re going to
earn. If you take a risky investment that might
yield 5, 10%, 20% it might give you zero and then you’re still going to be paying the
student loan debt as well, so you’re going to end up in the negative. Don’t take one of those opportunities and
think that you’re going to miss out. Pay off the student loan especially if you
can do it in 1 year, unless you’ve got something solid that you’re going to invest in. if you’re going to buy a duplex, you’re
going to buy some real estate, again, if you want to check out my info on that, I actually
have a real estate course for software developers specifically. You can check that out and I’ll give you
some straight up advice that I think could be the 4.57% interest on your student loan. But if you’re not going to do something
like that that’s going to be very secure, then I would just say pay it off, but always
use that principle to evaluate it. All right, if you liked this video, go ahead
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21 comments on “Pay School Loans Or Invest?”

  1. A R says:

    He's saying that if you do not have a plan, do not invest.

  2. LuisEspinozaMusic says:

    I'm in this exact same position. I am still in school and I graduate in May. I have paid off 20k while in school. I have 10k left. I plan to pay it off completely and stop worrying about it.

  3. JJSmith Lago says:

    lol I wish I ONLY had 31K at 5%. I was a dumb 18 year old

  4. occupynewparadigm says:

    Never pay your debts when you can invest. You take that 4.57% interest rate. The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%. This is a 7.12% return over debt. In about 10 years you have made back the principal on the loan after subtracting the interest rate paid. It's free money and a smart move.

  5. Devin Checa says:

    PAY THE DEBT FIRST! The market may yield returns over long periods of time but it has dips in between. Jim Cramer agrees, PAY OFF THE DEBT FIRST!

  6. Matthew Mullin says:

    Hi John, I read somewhere in the comment section that you manage to eat around 2000 calories a day in your one meal. I've chosen a 16/8 fasting 'plan' so I manage to squeeze in about 2 and a half meals between 1pm and 9pm. I seem to struggle to get those 2000+ calories in (usually around 1800) which Iv'e read can be detrimental to muscle building as well as general health.

    Being the big guy you are, surely 2000 calories a day is not sufficient, or is there some other reason you manage to keep muscular and lean on a reasonable low amount of calories?

  7. Arra says:

    Hey John, great video. Just wondering, when are you going to change the outro to end screen? It is much easier for mobile users to click on your videos/playlists/etc.

  8. King Henry says:

    What's a 401k?

  9. kkknotcool says:

    You cannot declare bankruptcy on a student loan. That makes a student loan way more of a risk than any other kind of loan. Unless the return is a huge percentage, like double stock market averages,(15% or more) than it is dumb to invest that money.

  10. Rose-shrouded Confessor says:

    I intend to pay off the 1750 dollars in loans I have then teach myself code like the growing 69% of Software Developers from 2016 who got their first real job in a year. 😛

  11. Sophisticated Swanson says:

    one note to add is that he said he only had 3 months of living expenses when you supposed to have 6 months. Get the 6-month savings first. Rainy Days are guaranteed to come in life, then become debt free, and then invest.

  12. Andrew Rowden says:

    The market is at a record high right now. The question should be, pay off your student loans, or save money to invest when the market has a correction in the next 6-24 months? I'd just pay them off so they aren't having over you.

  13. IamSpeedcubing says:

    Hello. I wanted to ask about what you would reccommend to do if, say, you live in a country where tuition is very good yet free, and all school expenses are covered by a scholarship, one that even allows you to study in a different place you would like to. What degree to choose between computer science, programming or software development?

  14. Eddienom says:

    Great video

  15. IOS Development says:

    I will never forget the day I walked into my bank, paid off my mortgage and asked them to close the account (redraws are big in Australia). It was the first time I felt I felt like a free man. My job became less important and I looked at riskier investments and even looked at being a freelancer. You can take a lot of hits being debt free.

  16. Peter K says:

    My student loan interest is 1,5 percent. I've invested the money in stock funds that dont pay dividens, so I pay taxes only when I take the money out. My return for last year was 9 percent. Of course it is not going to be that good return every year but 1,5 percent is pretty easy to beat. If my interest would be close to 5 i would have to think this over again.

  17. Austin White says:

    Nice! I'm graduating soon and I was going to ask you this exact question. Thanks a ton for the advice.

  18. WP With Tom says:

    I'd be in favor of paying off the school debt here as well. I know SO MANY of my peers have 30k+ in school debt like 5-10 years out of school and it's absolutely ruining their lives.

  19. Obama says:

    John you are awesome! People want to beat around the bush, but you get to the point and tell it like it is! You rock!

  20. Noobie747 says:

    Nice interest rate

  21. Noobie747 says:

    Wow 3% home loans are 8. Something in India

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