According to the U.S. Department of Education (ED), over 5.2 million people defaulted on student loans in 2025 alone. This is a scary statistic that leaves many people feeling like they need a plan for the future. Understanding the nature of your own situation and how you want to respond is important. The biggest question people ask themselves is if they should pay off their student loans in full or start investing earlier.
In this post I will dive into the different approaches to paying off student loans and provide you with the information that will be helpful to make your own decisions regarding this debt. If you are new here, welcome to my blog where I share tips on personal finance and investing for college students and young adults.
What about the loans themselves?
Student loans are sums of money granted to undergraduate, graduate, and professional students to help them pay for their education. By taking out a student loan you are banking on the idea that you will earn enough from your college degree to pay off these loans and still make enough money for yourself.
The federal government issues student loans based on your progress in college, dependency on your parents, and level of schooling. These criteria will help determine how much money you are eligible to receive and the rate at which the loans will accrue interest. Getting familiarized with your specific student loan situation is the first step to drawing up a plan that is best for you.
The math is simple, right?
The federal interest rate for new undergraduate loans as of 2026 is 6.39%, while the graduate and professional rate is 7.94% (data sourced from educationdata.org). A majority of student loan debt is federal, meaning these rates are going to be the most common for determining a course of action regarding investing.
The deciding factor may well be whether or not you are able to make a higher rate of return by investing your money or paying off student loan debt. Using data from the last 20 years, we know that the stock market has averaged an 11.18% annualized return when accounting for reinvested dividends. However, investing can be more complicated than that. To get a broader understanding of this topic you can check out my post Index Funds vs. Individual Stocks.
It doesn’t take a genius to figure out that 11 is greater than 7, so mathematically you come out ahead by investing while making the minimum loan payments. This difference may seem small, but the power of compounding magnifies it to a great degree, benefiting the investor in the long run. The math may be that simple, however, the reality isn’t. Private loans, income level, and your own goals can all affect your circumstance and make the decision more complicated.
Going against the numbers
Dave Ramsey is a personal finance expert and self-made millionaire who is heavily against the idea of debt. In his 7 step plan to get out of financial distress, Ramsey prioritizes paying off all forms of debt before investing any money at all. While his own financial history may have influenced his philosophy, he believes that debt adds unnecessary risk to an already stressful situation.
The Psychology of Money is widely considered one of the best finance books ever written. The author, Morgan Housel, broke his book into 20 short sections, with each serving an important lesson on human behavior regarding our money. In one part, Housel clarifies what it means to be rational with your money and what it means to be reasonable. Being rational with your money often involves the stone cold facts, while being reasonable takes into account that we are human beings with real emotions.
The point is that there is no definitive answer to the question, “Should I pay off my student loans or invest?” It boils down to your margin for error and what you deem to be reasonable. If you lose sleep at night knowing that your loan obligations continue to compound, then that is a big variable to consider.
What is my plan?
There is an argument for both sides. Investing money first is backed by the mathematical and rational approach, while paying off the debt can be a principled and reasonable decision. There is no universal right answer, that is why it is called personal finance.
If you are curious to learn more about how you can reason through personal finance decisions, check out my book review on The Psychology of Money, Morgan Housel.
I hope you found this post helpful. Consider subscribing to my blog to see more content like this.
This post is for educational purposes only and is not financial advice. I am not a licensed financial advisor.
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Very true. Personal finance is behavioral and psychological as much as it is mathematical.