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In deciding between maxing out 7% interest rate student loan repayment on the other hand, and investing in a SPY ETF on the other there are essentially two factors:

1) Is a projected/historical 8% better or worse than a guaranteed 7%.

2) Does the liquidity advantage of holding the SPY overpower the advantage (if one exists) of the loan repayment.


I figure that the second question has to do with personal preference. However, with a fairly basic assumption I think the first factor is more or less substantial enough to warrant a discussion.

One reason to prefer a guaranteed rate, is if the money is "needed" for something, like retirement income. However, assuming one is under 30 and is not concerned with having a reasonable amount of retirement income, is one answer objectively better than the other?

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    Even the first is a judgement call. What's your time window before you'll need the number? Is a 1% difference actually going to make enough difference to be worth worrying about, versus the potential of getting less (which comes along with the potential of getting more). Is a single fund going to be sufficiently diversified to minimize the risk? Re liquidity, remember that you can probably get a personal-line-of-credit loan for about 7% if you need it... – keshlam Sep 1 '14 at 2:42
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    Is there a reason for ignoring taxes in this question? That would be another factor to consider here to my mind along with whether or not there are brokerage costs to buying SPY and re-investing the dividends in fractional shares for another point here. – JB King Sep 1 '14 at 6:34
  • What country are you in? Taxes are a concern, and therefore where you are taxed matters. – Chris W. Rea Sep 3 '14 at 3:28
  • No reason for ignoring taxes. I think thats likely a legit concern. US, NY and significant tax liabilities. So, I suppose that would serve as another reason to pay minimums on the loans. – CrackStack1 Sep 4 '14 at 21:13
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Paying off the student loans slower and investing the rest has some advantages - the interest is tax deductible (essentially lowering that 7% number), and it helps allow you to build up a liquid emergency fund which is more important to financial security than returns.

  • How do you know the interest is tax deductible? The OP didn't disclose his country. What country are you assuming? – Chris W. Rea Sep 3 '14 at 3:27

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