Pay Off Student Loans Or Invest Your Extra Cash Flow?

By Lisa Strohm

Do you have student loans as well as extra cash flow that you can’t decide what to do with?  First of all, great job! You’ve put yourself in a good position, and this is a nice question to be asked. The right answer depends largely on your individual financial situation. Paying off some debt might help you sleep better, but is that the best decision financially?

There are three big factors to consider before deciding what to do with your extra cash: whether you’re already saving, loan balances in relation to interest rates, and whether you work in the public or private sector. 

Are You Already Saving?

Have you built up some reserves in case of emergency? Many experts recommend setting aside between 3 and 6 months’ worth of household expenses. Depending on your situation, that could be anywhere between $5,000 and $20,000. This cushion should be accessible in case you lose your job or have a medical emergency. 

On top of this emergency savings, are you thinking about retirement? Ideally, the earlier you start saving for retirement, the better. Be sure to take advantage of employer 401(k) matching contributions—not doing this means you’re leaving money on the table. If you already have some savings and are contributing to retirement accounts, it would be prudent to consider putting that extra cash toward your student loans. 

How Much Do You Owe and What Are the Interest Rates?

In 2017, the average student loan debt was around $38,000. According to a survey of Millennials, 42% of Millennial women owe over $30,000. But more critical than the absolute amount you owe is the ratio of debt-to-income. Someone earning $150k per year will have less difficulty paying off $30k in debt than someone making $45k per year. Earning a substantial income like $150k per year will make it easier to pay off your loans quickly and also result in you having a lower debt-to-income ratio.  A lower debt-to-income ratio will also enable you to obtain favorable terms for other financing options, such as auto loans.

Your interest rate also plays a major role in deciding where to put your extra cash. Currently, federal loans range from 4.53% for undergrad to 7.08% for graduate loans. Rates on the higher end will take longer to pay off and you’ll see a higher benefit from early payments. Compare your rate with the 4.5% average rate of return for the S&P 500 over the past 20 years. If your interest rates are above that, pay down the loans. 

Do You Work in the Public Sector?

Public sector generally means government employees or employees of 501(c)(3) accredited organizations. Some hospitals and many registered non-profits fall into this category. If you work in the public sector, you may be able to take advantage of a loan forgiveness program. Generally speaking, after you’ve made 120 qualified payments, you can apply to have your federal loans forgiven. This could be helpful, but in some cases, the government considers forgiven loan balances as taxable income, which could leave you with a sizeable tax bill in the future. Thus, be sure to consult with a financial, student, and/or tax advisor regarding forgiven loan balances.

The Bottom Line

It’s a nice position to be in—you’ve worked hard and have some extra cash flow. Both paying down debt and investing are important steps toward building a solid financial future. However, there are some important elements, like current savings, loan balances, interest rates, and work industry, to consider before deciding which choice best fits your unique situation. 

But you don’t need to navigate this path alone. We at The Athena Network are here to guide you. To get in touch, email, call 484.224.3439, or schedule a free, no-pressure introductory meeting. Together we can decide how you can get the most out of that extra cash.

About Lisa

Lisa Strohm, CFP®, MBA is the founder and CEO of The Athena Network and Good Life Advisors of the Lehigh Valley, fee-based wealth management firms. She specializes in providing financial planning, investment management, and life management services for women and their families across the U.S. With more than 18 years of industry experience, she sets her firms apart from traditional wealth management companies by focusing on providing clients with an educational, collaborative, supportive experience that inspires her clients to engage in their financial lives. If you have a question, please click this link to schedule a phone call today. To learn more, visit or connect with Lisa on LinkedIn and Facebook.

Investment advice and financial planning offered through Good Life Advisors, LLC, a registered investment advisor.  Good Life and The Athena Network are separate entities.