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Difference Between Student Loan: Repayment Vs. Investing

Student loans can be a financial burden that many graduates carry with them long after they’ve earned their degrees. But what if there was a way to turn the tables on student debt and use it as a stepping stone towards building wealth?

The Student Debt Conundrum

Before we dive into the world of investing, let’s address the elephant in the room: student loan debt. In India, the average student loan is Rs. 25 lakh, and millions of borrowers are grappling with the question of how to tackle this financial obstacle. The good news is that there are various repayment options available, each with its own set of terms and conditions.

Option 1: Aggressive Loan Repayment

One approach to dealing with student debt is to take an aggressive stance by paying off the loans as quickly as possible. This can provide you with a sense of relief and financial freedom sooner. By making larger payments, you’ll reduce the principal amount and pay less interest over time.

Option 2: Balancing Loan Repayment and Investing

Another option is to strike a balance between repaying your student loans and investing your money. This approach acknowledges the power of compound interest and the potential for investments to grow over time. Let’s delve into the concept with an example.

The Calculation: Repayment vs. Investing

Imagine you have Rs. 25 lakhs in student loan debt with an interest rate of 8.5%. You have two choices:

Option A: Aggressive Repayment

  • Pay off the loan in 15 years by making monthly payments of approximately Rs. 24,600.

The Amortization Schedule:

Option B: Balancing Repayment and Investing

  • Make minimum monthly loan payments of around Rs. 24,600 and invest an additional Rs. 24,600 each month in a diversified investment portfolio with an annual average return of 13%.

Now, let’s fast forward 15 years and see how your financial situation might look.

Option A: Aggressive Repayment

After a decade, you’ll be debt-free. No more monthly loan payments. You’ve successfully eliminated your student debt.

Option B: Balancing Repayment and Investing

After 15 years, you will have paid down your student loan completely. However, you will also have accumulated an investment portfolio that could potentially be worth around Rs. 1.3 crore, thanks to compound interest and market growth.

Considerations for Your Decision

Before you decide between aggressive loan repayment and a balanced approach to investing, here are a few key considerations:

  1. Interest Rate: If your student loan interest rate is exceptionally high, it may make more sense to focus on aggressive repayment to minimize the total interest paid.
  2. Employer Benefits: Some employers offer student loan repayment assistance or matching contributions to retirement accounts. Be sure to explore any potential employer benefits.
  3. Personal Financial Goals: Your financial goals and risk tolerance are unique to you. Consider what’s most important, whether it’s being debt-free quickly or building wealth over time.
  4. Tax Considerations: Interest on student loans is often tax-deductible, which can provide a financial incentive for maintaining the debt while investing.

Conclusion

The decision between aggressive student loan repayment and a balanced approach to investing is a complex one, influenced by various factors. Remember that building wealth and managing student debt are not mutually exclusive. With careful planning and a well-thought-out strategy, you can use your student loans as a tool to work toward your financial goals, whether that’s becoming debt-free or building a brighter financial future through investment.

Know More:

Disclaimer:This blog has been written exclusively for educational purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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