I have money in the stock market but some student loans – should I pay off my student loans now?
I have roughly 5,000$ in the stock market and have around $7,000 in student loans at 8.9%, I am still a student and the loans are deferred until May of 2011. Should I take the money out of the market and pay off my student loans, leave it in stocks, or move the money into a roth IRA.
student loans
You can flip the question around using an idea from finance classes called a “sunk cost analysis.” Ask yourself, “Should I borrow $7,000 at 8.9% to invest in the stock market?” Effectively, that is what you have done.
This depends how much you’ll be charged when you pull your money out of the stock market, and if there will be a penalty if you pull the money out. If you have to pay 8.9% to withdraw it , then i’d recommend leaving it in the stock market.
Is the interest deferred or just the payments? If interest is accruing, I’d be inclined to pay down the loans, being sure to reserve some funds in an insured savings or money market account for emergencies.
I am not a stock market fan, but it seems to be on the way up, so I would leave the money in the stock market (or use elsewhere, like paying more college bills) and worry about the student loan when you are to start repaying it. No Roth IRA. At this point you need your $ for current living expenses.
The deferral date is irrelevant. And thinking in terms of offsetting your 8.9% interest rate makes limited sense.
What you’re doing is treating $7,000 you don’t own as though it’s your own collateral to finance a high risk stock market capitalization. That is very uncool and unsmart.
You’re trading $7K sure debt for money in a very high risk environment.
Try it this way as I’m really hoping to show you a few views so you can make the best choice for yourself:
You have about two thirds of your ed debt in ready cash that could pay off most of the outstanding loan. You are not only risking immediate payback of much of it in the shaky stock market, you could lose your cushion yet still owe the $7K.
That’s a zero sum game—unless you can guarantee risk-free earnings in excess of the 8.9% interest.
I do this for a living and notwithstanding, I’ve been liquidating market investments because I see a market swoon in mid-January and continuing well past Feb. Not meant as a boast but I’ve been right in calling corrections a number of times. I usually underestimate the severity of the correction. This time I’m not taking chances and have reduced margin (borrowed $) exposure over th past year from $230K down to $13K and still reducing nearly daily.
It’s a good idea to be very conservative when things are so unsettled. And they are!
At first glance it may seem like a good idea to keep the money in the stock market, because it is going up.
Problem with that plan is, so long as everything goes *perfectly*, it will work out. (Quote borrowed from Dave Ramsey)
Mathematically, you end up farther ahead if you pay off the debt prior to investing in the stock market. (I compared both ways on a spreadsheet.)
I recently pulled my fun money out (last month), and paid off all my debts.
Now I can dump FAR more money into the stock market and *when* it loses money, I won’t have any debt (i.e. monthly payments) to service.
Google: Dave Ramsey, he has a pretty good following.