Should You Pay Off Student Loans or Invest? The Definitive Guide (US & UK)

Should you Pay Off Your Student Loan or Start Investing? This definitive guide will help you work out whether investing or paying down student debt is best for you. (Inc Student Loan Forgiveness Strategies)

There is so much information about student loans and investing online, but most of it isn't that comprehensive, or it’s just downright wrong. So it’s time to lay out exactly how you should be thinking about this, and giving you all the information you’ll need to identify whether you should be paying down that debt or investing.

Sections:

Intro: (0:00)
Investment Rationale: (3:31)
US: (9:30)
UK: (12:30)
Subjective Factors: (15:42)

Step 1: Get an Emergency fund

Before you even start to think about investing or even paying down your debts there is one this you absolutely have to do first. You’ve heard it before, and I’ll say it again. You need to have an emergency fund. You need to have enough cash saved up to fund 3-6 months of your living costs if the worst should happen.

I know it can seem counterintuitive to have cash in the bank whilst you’re got some big old debts outstanding. But just imagine if you’d made a big overpayment on your loan, you’re feeling pretty pleased with yourself, and then suddenly you crash your car, and you’ve got no cash to pay for repairs. And you end up having to pay for it on your credit card that’s gonna charge you a hell of a lot more than the student loan did in the first place! So always keep some cash on hand.

Step 2: Educate yourself on Investment Returns

Most people make the basic mistake of looking at the average return of the stock market 9% and thinking “Hey, this is bigger than the rate I’m paying on my loans. So surely I’ll be better off by investing”. The thing people miss here is that that average stock market return is not guaranteed, whereas the student debt interest is. And even though the average is 9% you still have a very high probability of ending up with less.

You also need to consider that if this was just a normal investment opportunity, you’d be taking all of the same risks that come with investing in the stock market, for only a fraction of the return.

Part 3: Student Loans in the UK & US

I cover off in detail the differences between the types of student loans and how each of them will affect your decision.

Student Loan Refinancing Resources:

Part 4: Subjective Factors

Arguably, this is the most important part. What are your goals, what are you trying to achieve? Do you want to be debt-free as soon as possible or do you feel like you can handle the risk and want to start learning about investing? I talk about all the factors you need to consider.

DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice - James is not responsible for investment actions taken by viewers. Please seek out a regulated advisor if you require assistance (whilst James is a financial adviser, he does not provide advice through this Youtube Channel, which is not affiliated with his employer).

James Shack™ property of James Shackell
Copyright © James Shackell 2020. All rights reserved.
The author asserts their moral right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this channel and any video published on it.

[JamesShack]

Thanks for watching! Please do feel free to share your own experiences and strategies below, and hopefully, someone will be inspired by what you've done! And let me know what you think of the video, are there other topics you'd like me to cover? I'm just starting out and would love your feedback!

[tryagain]

This is very high integrity content. No clickbait, extremely thorough.

[jannimcflurry]

First time seeing one of your videos, heard the intro and subscribed as soon as you mentioned it. Can already tell how authentic you are and am going to love watching your videos, another gemstone found

[Yyunm]

Hey man, great video! It would be interesting to see a video on saving for a house, what to prioritize, if a house deposit is more important than investing in stocks, when/ if to take money out of stocks to buy a house etc... I'm 22 and graduated from uni last year, and personal finance really interests me. Would you ever consider a series of videos on financial check ups for viewers? Maybe we give you stats (income, expenses, long term and short term goal etc) and you give advice? Anyway, great stuff! Looking forward to more videos :)

[finlaysutherland]

Really good video here! Not many that compare US and UK Student loans, and certainly helps with there being so much influence in the US than some of the people in the UK view student debt in the same spotlight as US debt, which isn't all too handy.

Realised how good a deal UK student loans were so personally I've been maxing it out, then investing whatever bit of loan I have left and I'm really happy I chose to do that instead

[jenc]

Great video! I love your no BS approach. Keep up the good work

[abbicampbell]

I’m on Plan 2 (started in 2015) and have only recently started a job meeting the threshold for repayments so have only been paying back for approximately 6 months. My current outstanding balance is ~40k. I am also trying to save for a house deposit and I know that mortgage lenders do not take into account any student loans someone might have, so for me I pay the minimum taken at source with the understanding that it will likely be written off after 30 years

[Donordoug]

Hello. Brilliant videos.
Do you feel this video works the same for mortgage debt at 7% when you have an access mortgage?

[tomroberts]

Thanks for this video James! I'm watching it a few years on. I've got lots of investments but now that my UK Plan 1 loan has jumped from next to nothing to 5% interest, I'm really strongly considering paying it off by selling off some of my investments that have done well over the last 4-5 years. It's all quite confusing but I'll definitely pay it off through salary sacrifice over the next few years anyway, so in my mind, I may as well pay it off now and save some interest (appreciate I'll be giving up potential stock market gains and divis from the sold part of my portfolio). I'd appreciate your thoughts!

[TomWhitehead]

Hi James, I was wondering what your thoughts were on postgraduate loans, as these work very differently from undergraduate loans. For these loans, you have to repay 6% of anything you earn over £21, 000 (and this repayment threshold is flat, meaning it doesn't go up every year). The interest rate is RPI + 3 and doesn't change based on how much you earn. So I took out a £11, 000 last year that currently has a 5.3% interest rate. Now, I'm thinking due to the lower repayment threshold and the much greater likelihood of earning beyond it, it makes sense to just pay this off in a lump sum if I can? Otherwise I will end up paying much more than 11, 000 through salary deductions but over say 10-15 years? Does my thinking make sense here?

[bc]

Hey James, excellent video. Coming over from r/ukpf I saw that you didn't study finance at uni but are now working in that sector. Would you consider making a video on pathways into the finance industry for non finance/econ students and what that's like at some point?

[yecourse]

Hi James, found your channel last night and watched some of your videos, they’re really useful and informative - cheers! On the basis that I have a student loan, but have only graduated recently so have a salary below the threshold to begin paying it back, would you say it makes sense to invest, as the interest on my loan is only going up at the rate of inflation?

[calarthur]

Also it's worth remembering that if you die a UK student will be written off

[MaxAtkinsonGuitar]

Hi James, great content as usual. I had a question. I've got student loan (started post 2012) that I will definitely have paid off before the 30 year date when it's wiped and I earn over £48, 000 and therefore fall into the 3% interest bracket. Does that mean I should be making additional contributions to my student loan payments and cut some of my investments down? Currently, I invest around 40% of my pay. Thanks!!

[LiamR]

I'm in the UK and just about to pay my wife's student loan off. She's in the 17% of people who will manage to pay it off in under 30 years.
Not because she's a high earner, just because the loan has £6, 000 remaining.

[FlyingFun.]

My daughter is going to uni this year ( UK) we have the money to pay for it ( my retirement pot ) outright but due to those rules we decided she might as well get the loan as she is unlikely to be a high earner.

[DavidBeaton]

Great video! Can I ask what software you used to make it?

[RichardPCUK]

Starting in 2023, the debt is written off after 40 years, not 30. Does that change your thinking at all? I understand this extention of the term from 30 to 40 years is to ensure more people pay back their loan. The interest rate is changed to RPI or CPI + 0% and the threshold is lowered to £25k I think.

[jonathanhowson]

I graduated in 2009 in the UK. Last time I checked a couple of years ago i was paying 1.7% interest. Could this be upto around 9% now?

[Beingfrankwithyou]

Payoff debt early>making payments for years