Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh financial decisions. Our columnist will give her verdict. Tell us in the comments if she’s right. And please let us know your suggestions for future Financial Face-off columns.
The Biden administration’s much-discussed student-loan slashing plan is expected to roll out soon with online applications expected to roll out in early October. Individual borrowers earning less than $125,000 per year (or $250,000 household income) will have up to $10,000 of federal student loan debt forgiven; Eligible Pell Grant recipients will receive an additional $10,000.
Given some financial leeway, what should borrowers do with the “extra” money that will be in their monthly budgets: pay off other debt or invest in the stock market?
Why it matters
Student loan debt is a heavy burden for many Americans. About 45 million people collectively owe $1.6 trillion in federal loans, White House says. According to the Education Data Initiative, the average monthly payment is $460.
That debt has changed the lives of some borrowers, forcing them to procrastinate on goals like buying a home, getting married, or having children.
Student loan debt has staying power: It takes the average borrower 20 years to repay their loans.
Invest it – although the Dow Jones Industrial Average DJIA,
and S&P 500 Index SPX,
are on the decline this year.
When you borrow a student loan, you might feel like you’re just passing by. You may have used the student loan payment pause to pay the basic costs. But now that some student loan relief will be permanent, you have an opportunity to be conscious of what you’re doing with that extra money, said Kelley Long, a certified financial planner, CPA and founder of Financial Bliss in Oro Valley, Ariz.
Borrowers locked out of major financial milestones because of their debt can finally “pay yourself first” by opening an investment account.
This can be especially important for people who thought they couldn’t afford to invest because their budget was eaten up by their student loan payments. Some people assume that investing is for wealthier people with a well-established financial life. Now is a good time to reconsider that assumption, Long said.
“There’s so much psychology in your identity as a money man,” Long said. “When do you start considering yourself as someone worth investing in? Which situation must exist? The answer is — I hope you’ll say, ‘Oh god, I probably need to start thinking of myself as an investor yesterday, tomorrow, today, right now.’”
One way to make investing easier to get started is to start with your personal amount of money, which “doesn’t take long to think about,” says Long. For example, you might have no problem spending $11.99 on a shirt at a discount store and only wearing it once or twice. “You invest in these disposable retail clothes and you know you’re not getting anything in return,” Long said. “Whatever that amount is, you can afford to put that amount into an investment account on a monthly basis.”
With a low-cost investment provider that doesn’t have minimum account balances or charge fees, you could set up an account where that amount of money goes into an index fund each month.
“Before you know it, you have a comma in your account and then five digits and it’s accelerating,” Long said.
Of course, investing now can feel scary as markets enter the bear market this week.
But Jack Hills, Icono Capital’s chief investment office in Rochester, NY, said there’s no time like the present.
“Imagine seeing something you need, already buying every month, and typically paying full price for a 15% to 25% discount,” Hills told MarketWatch. “This is the stock market now.”
He added: “How many of us curse ourselves for not buying more or anything at all in the first quarter of 2020? Granted, it’s terrifying to see the markets lose so much so quickly and it’s always impossible to know where the bottom will ever really be, but realistically we find ourselves in a similar opportunity right now. Also, it’s money used monthly, which means it’s an average dollar cost that outweighs the downsides as well as the ups.”
Is my judgment best for you?
On the other hand, if you have debt with interest rates of 7% or higher, this is generally the case makes more sense to pay off those debts first, Long said. That’s because carrying that debt costs more than what you could make, on average, from long-term stock market investments.
It’s also true that paying off debt can feel mentally liberating, no matter the interest rate.
“Some people might be able to sleep better knowing they’ve paid off their car,” Long said. “Maybe they have personal loans or a 401(k) loan or something else that doesn’t constitute bad debt, but they would be more comfortable not having that obligation.”
Paying off other debts can also have real-world consequences that you might not have thought of, such as: For example, improving your credit score and helping you qualify for a lower-rate mortgage, said Chris Haigh, a certified financial planner and CEO of Icono Capital.
He gave two scenarios: In Scenario 1, you pay off other high-interest debt, which increases your FICO score, and you qualify for a 5.875% mortgage with a balance of $300,000, which would make your entire loan cost $638,000. In Scenario 2, you invest in the stock market, your FICO stays the same, and you get a 6.5% mortgage on a $300,000 balance. That brings your total borrowing costs to $682,000. That’s a huge difference that you may not have considered.
Can’t decide whether to invest or pay off other debts? They could try splitting the money into thirds, Long suggested. A third “get past you” by paying off additional debt; a third take care of your “future self” by investing for retirement (or emergency savings if you don’t have enough savings); and a third goes towards “presentation” by spending the money on something that improves your current life, such as B. a cleaning service, joining a club or a monthly massage.
“No matter what you do, the most important thing is to be conscious of the ‘extra’ money, especially if you’ve gotten used to not already receiving payment due to the payment pause – it’s easy to add extra money to our spending without one Noticing the difference, even if the payment itself seemed painful when it took place,” Long said.
Tell us in the comments which option should win in this financial duel. If you have ideas for future Financial Face-off columns, email me.
https://www.marketwatch.com/story/your-student-loans-are-canceled-should-you-use-your-extra-money-to-pay-off-other-debt-or-invest-in-the-stock-market-11664405887?rss=1&siteid=rss Your student loan will be cancelled. Should You Pay Off Other Debts or Invest in the Stock Market?