thesealocust wrote:Depends entirely on the interest rate. Lots of federal loans have such hilariously high rates right now that you'd have to take on a lot of risk to even have a chance of making the investment payoff down the line while experiencing shitloads of volatility along the way.
Tax advantaged retirement accounts are nice, but so are high guaranteed rates of return (which is what you get from paying down debt).
First, putting $5k in a retirement account nets you more take home money than $5k in loan repayments due to decreased tax liability.
Depends on interest rates. You make a good point that your investment rate of return and your loan interest rate should both be adjusted to reflect tax considerations
lukertin wrote:Second, because savings accounts appreciate in value as you save, whereas loan accounts depreciate in value over time as you pay them off, the absolute "return" is more when you save than paying off loans. (i.e., saving 10k at 5% and reinvesting the interest nets you more money than the interest saved vs. paying off a $10k at 5% over time).
this is a fallacy. The effect is similar in both directions. Yes, you get more earnings from interest on interest, but the inverse is true that you save more by paying loans off faster, as the interest on a declining balance shrinks.
lukertin wrote:Federal loan interests may be high (up to 7.9%?) but it's about equal to the expected annual market return of the S&P500. There is no situation in which I would pay off a federal student loan if I could sock that money into a 401k.
Ignoring the tax adjustments, if both are more or less the same, theoretically it shouldn't make a difference. However, there is more volatility and inherent risk in equity investments versus fixed loans. Because of risk premium, if both expected returns are similar, you should pay off the loan. Additionally, there are other benefits to repaying the loan, such as piece of mind. Lastly, I'm not sure where you're pulling that expected rate of return on investments from, but I'll be nice and bite my tongue
Back ten years ago when student loan rates were around 3-4% and expected returns were easily 8%+, it'd make sense to not repay. In the current environment of high student loan rates, low expected investment returns, and high volatility, you'd be crazy to not repay your loans.