As a student approaching graduation with over $100,000 in student loans the question came up as to whether I should pay the loans off ASAP or to consolidate the loans and pay a low interest rate for 20 or 30 years. My brother suggests that I pay them off as ASAP and eat Ramen noodles for the next 10 years. I must respectfully disagree since I would rather die than eat another 20 cent package of Ramen.

My reasoning stems from a simple, humorous example where you have accumulated $20,000. You are given 3 options to choose from.

1. Keep the $20,000 in your bank account earning 5.0% interest.
2. Invest the $20,000 in stocks with an average return of 10% interest.
3. Use the $20,000 to pay off your consolidated student loan at (-) 6% interest.

Your boss fires you, your wife runs away to Vegas, and a tornado sucks your house into the sky. Your cat and your dog survive the disaster.

1. You kept the $20,000 in your bank account earning 5% interest, put yourself up in a pet friendly apartment for several months, find a new job, and meet a beautiful woman 20 years younger than you. You were able to get your life back on track because your savings served as a security blanket.
2. You invested the $20,000 in the stock market. The market performs below average and you only make 6% interest to break even with your consolidated college loan. You sell the stock to put yourself up in a pet friendly apartment for several months, find a new job, and meet a beautiful woman 20 years younger than you. Once again, you were able to get your life back on track because your savings served as a security blanket.
3. You use the $20,000 to pay off your consolidated student loan at 6% interest. Your loan is still $80,000. Your wife still runs away to Vegas, but this time she takes the cat and dog with her. You don't meet a beautiful woman 20 years younger than you because you're completely broke. You have no job, no wife, no cat, no dog, and no money. You find out where the tornado relocated your house too, climb to the second story, and jump off the building. Unfortunately, you only break both of you legs and both of your arms. You wish that you could reach the shotgun several feet away and end it all, but you are unable to move your broken arms. The ambulance arrives and the doctors restore you to health, but when they release you from the hospital there is nowhere for you to go so you live on the streets and eat old tuna fish sandwiches out of the trash for the rest of your life.

So, does it really make sense to be fanatical about paying off your student loans? In my opinion, the answer is simply no.

You are likely to make more money and lose less in the long run by investing in the stock market. Do the math and you can see that if you make 10% or $2,000 dollars in the stock market and you lose 6% or $1,200 from your loan, you are still up $800.

If you don't want to take the risk in the stock market, then keeping a good portion of your money in a high yield savings account will offset most of the interest that is accruing on your college loan.

The interest that you earn from investing the money is more than the interest that you lose from the student loan in most cases. Even if you are fanatical about paying off your college loans, it will still take you 10 years to do it. Why not just consolidate the loan for 20 years and build some financial security through wise investment strategies?

For a few more ways to earn extra interest, visit our banking section for high yield savings accounts and check out our article about how to get 3-10% Credit Card Rebates. It only takes a few minutes and will make a big impact on your financial future.

Best Financial Wishes,

The Net Analyst