Should You Invest Or Clear Off Your Student Loans First?

It is common for students to take up a student loan to fund their studies, especially in higher education. In fact, a survey by HSBC shows that Singaporean parents spend an average of $21K a year just to be able to send their children to university, even if it means landing themselves in debt. This amount is twice that the global average.

But when the time comes to service the loan, a pertinent question becomes apparent: is it better to pay off the loan first, or spread out the loan and set aside some money for investments?

Those who are fresh out of school and finding their first jobs will relate to this conundrum. While there is no one-size-fits-all approach, here are some pointers you can consider.

Keep track of your debt

Before you make any decisions, you have to know how much you owe in total. Familiarise yourself with the terms and conditions of the loan, such as the tenure length, interest rates, and instalment options, if you haven’t already done so. It will be a good idea to set up a meeting with your loan provider to go over the contract once you are out of school.

Plan according to your abilities

As with most things in life, having a plan is crucial. While clearing off your debt lets you pay less interest and relieves your burden earlier, you should also be realistic about it. When crafting out your repayment plan, don’t forget to take into account your income and expenses. Commit only to what you have the ability to pay, otherwise you risk defaulting on your payment plan and suffering penalty fees.

There is plenty of good advice out there, but one general guideline goes like this: your debt-to-income ratio should be no more than 25-30% of your pre-tax income. In other words, you should spend no more than this percentage of your salary on paying off debts.

If you can, invest!

Investing is best embarked on starting from a young age, because you can afford to take higher risks and wait out your investments. If you have enough extra cash, investing some of it is a wise choice. It will be a useful way to grow your money, and bolster your financial status. You can get in touch with a financial advisor, or learn through investment courses on how best to get started.

But no matter what, one thing you need to do is weigh your options. The most important two things to compare are the interest on your debt, and the returns you expect to make from your investments. If the interest rate is high, it might be a smarter choice to focus on clearing the debt first.

Advantages of taking your time to repay a debt

You might worry that by setting aside funds for investing, you will take a longer time to repay your student loan. However, there are actually several advantages in taking your time to repay your student loan. By holding on to your cash first, you can build up your emergency fund and financial buffer, which is especially crucial at this age where your income source might still be unstable.

Some student loans even have an early repayment penalty, giving you no reason to rush out your payments. Additionally, with more money in your bank, you can earn a little more through interest in your savings account.

Conclusion

There are pros and cons for investing as well as focusing on paying off your student loans. At the end of the day, it depends on your income, risk tolerance, and the loan plan you have. In fact, these are considerations you can take into account when faced with any kind of loans, including a hefty debt consolidation loan or personal loans.

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