If you’re struggling with the dilemma of whether to pay off your student loans or invest, you’re not alone. There are millions of Americans struggling with student loan debt; between rent, groceries, utilities, and a variety of other expenses, your monthly income can dwindle rapidly, leaving little for investing.
While common financial advice is to pay off debts as soon as possible, you may want to reconsider that when it comes to student loans. If you have a low-interest federal student loan, you could be better off investing or saving for retirement than sending all of your “extra” cash to your student loan holder.
In a perfect world you wouldn’t have to debate whether you should pay off student loan debt or save for retirement, however, there are ways for you to prioritize both.
Start with an Emergency Fund
One of the best ways to start saving is by building an emergency fund. This is a safety net of cash you can use for any unexpected expenses, like a sudden layoff, emergency medical care, unanticipated veterinary needs, or home and car repairs.
While your financial circumstances will dictate how much money you should save in an emergency fund, the general rule of thumb is that you should have between three to six months of living expenses saved up for financial emergencies.
If that seems like an intimidating amount of money, start with a smaller sum—say, $500—and build your emergency fund up from there. It could be good to have a dedicated account for your emergency fund. One great option is a checking and savings account, such as SoFi Checking and Savings™. Where you can earn 0.20% APY on all your cash and take out the money whenever you want at no charge!
Having a financial safety net is critical should any unforeseen, urgent costs arise. If you are prepared with your emergency fund, your loan repayment and retirement savings can stay on track.
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Prioritize Minimum Payments
While paying off student loan debt, it is important to make the minimum monthly payments on all of your loans. If you fail to make the minimum payments each month, your loans could become delinquent or end up in default, and that is a situation you want to avoid.
The consequences of defaulting on a student loan are severe and include losing the benefits of deferment and forbearance, having to pay the unpaid balance of your loan in full, and possibly, being taken to court.
To avoid these repercussions, remember to always make your minimum payments, and make them on time. To make it easier, sign up for automatic payments with your loan holder.
The money will be taken directly out of your account every month so you’ll never have to worry about missing a payment. And with certain lenders, you could qualify for a reduced interest rate when you sign up for AutoPay.
If you have a little wiggle room in your budget, you could also consider paying a bit more than the monthly minimum on your student loans. Since most student loans have no prepayment penalties, it could be one of the fastest ways to accelerate your student loan repayment.
Refinance Your Student Loans
If you are buried under a number of student loans, it could be time to consider refinancing. Before you do, make sure you’ve done your research on the specific types of loans you hold. Refinancing a federal student loan will eliminate benefits like deferment, forbearance, and income-based repayment plans.
However, if your student loan debt is incredibly high, or you are already carrying both private and federal student loans, refinancing could be an smart option for you. When you refinance your student loans, you take out a new loan—usually through a new lender—with a new interest rate and new loan terms.
If you have a good credit history and solid earning potential, you could lower your interest rate or monthly payments, ultimately reducing the amount of money you pay over the life of the loan. To see what refinancing could do for you, take a look at the SoFi student loan refinance calculator.
Take Advantage of Employer-Sponsored Retirement Plans
If you are employed and are able to enroll in a 401(k), take advantage of the opportunity. A 401(k) is an employer-sponsored retirement plan to which both you and your employer can contribute. Often, employers who offer 401(k) plans will match your contributions up to a certain dollar amount or percentage.
If you’re struggling to pay off debt or save for retirement it might make sense to take advantage of the free money your employer is offering by taking advantage of the match program. Another great benefit of a 401(k) is that you can set up your contributions through payroll, so they are automatically deducted from your paycheck.
Use Windfalls Wisely
Another great way to make a dent in paying off debt while saving for retirement is to use financial windfalls wisely. Instead of using your tax return to splurge on a new outfit, a swanky vacation, or other indulgences, use that money to pay off debt or save for retirement.
You could even split it up and use a portion to repay student loans and use the rest to add to a 401(k) or another retirement account, like a traditional or Roth IRA. Paying down debt and investing now will be impactful in the future as you get closer to retirement.
About SoFi Invest®
If you’re already making headway toward repaying your student loans and are making active efforts to save in a 401(k) or IRA, consider investing as part of your financial strategy. Investing is a great way to put your money to work, instead of having it sit idle in a low-interest savings account. One way to boost your investments is to open an investment account with SoFi Invest.
At SoFi, you can begin investing with as little as $100. You’ll have access to a credentialed financial advisor who will work with you to set up your financial goals—a step toward making your goal of repaying your debt and investing at the same time a reality.
SoFi will work with you to establish your threshold for risk and will diversify your investments to match. With portfolio selection and auto-rebalancing, SoFi is a great option to begin investing.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through `SoFi Wealth, LLC. A registered investment advisor. Neither SoFi nor its affiliates is a bank. SoFi Checking and Savings is offered through SoFi Securities, LLC, member FINRA / SIPC .
SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
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