04/24/2015 02:25 pm ET Updated Jun 24, 2015

Investing vs. Student Loans: Which One Should Millennials Choose?

This article was written by Adam Cecil of PolicyGenius.

Millennials are facing more student loans than ever before. Interest rates are high. Loan principals are even higher. Even those with good jobs are struggling to pay their monthly minimums.

This is bad for a lot of reasons, one of which is that people in their 20s are not investing nearly as much as they should. This makes sense-despite growing student loan debt, salaries are stagnating. What little extra money millennials are making is going to extra payments on student loans in an attempt to pay down student loan as quickly as possible.

Unfortunately for millennials, by not investing in your early and late 20s, you're missing out on a huge opportunity for wealth growth.

Read more about why your 20s are the perfect time to invest.

So, the big question: should you pay off your student loans as quickly as possible or put that money towards investment?

Before we get too far, let's be clear that we're not suggesting anyone forgo paying off their student loans in favor of investing. Always pay at least the minimum required amount every month on your student loans. If you can't pay the minimum, you shouldn't invest, and you might want to consider options for lowering your monthly payment.

This answer, like a lot of things financial, depends entirely on your own student loan situation. Some student loans have pretty low interest rates hovering around 4%. Others can get as high as 7 or 8%. Compare that to the S&P 500, which has historically returned an average of 11% every year.

Of course, the stock market doesn't return exactly 11 percent every year-some years it's higher, and some years it's much, much lower. And a lot of millennials came of age in a time when the stock market was down and debt seemed to be crushing everyone. In this context, the idea of paying off debt as quickly as possible just makes sense.

But there's also the danger of not thinking long-term. You don't need to worry about the stock market not returning at a constant rate. You only need to be worried about how much money you have when you turn 65. According to Patrick O'Shaughnessy at Millennial Invest, every dollar you invest at age 22 will be worth $17 when you retire. Wait until you're 25 to start investing and that dollar has decreased in value to $14.5. If you pay off your loans in 8 years and start investing when you're 30, that dollar is only worth $10.4. By waiting until you're done paying off student loans to start investing, you've lost almost $7 for every dollar you would have invested.

You also need to balance in taxes. If the amount of interest that you pay on student loans is tax deductible, it might make more sense to keep paying that interest and get the tax break later. That tax break can then be spent on either paying off more of your student loans or investing. Of course, contributions to an IRA composed of stocks and bonds are also tax deductible.

Ultimately, your decision will depend on your own loans. Are your interest rates low enough that it makes more sense to push that money into investing? Or would you lose money by holding on to student loan debt for a longer period of time?

Luckily, this answer is pretty easy to find with Student Loan Hero's payoff vs invest calculator. Just put in your student loan rates, how much extra cash you can pay every month and what kind of investment you're looking to start with, and Student Loan Hero will help you decide if you should pay off your loans are start investing.

Don't know where to start when it comes to investment? Read our guide to investing your first $1,000.

It's also not an either-or situation-if you have enough money, you can both invest a small amount and add extra to your student loan payment every month. For a lot of people, this might be the smartest way to handle it: pay off student loans as fast as possible, but don't neglect wealth growth or your retirement fund.

Have an opinion or a story about investing vs. student loans? Leave us a comment below!


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