There are lots of questions on SE about investing versus paying off student loans. This is not one of those questions. This question is about investing while you are still in school to pay off student loans later.
I am in graduate school for the next three years. I have student loans that are accumulating interest. But until I finish graduate school, the interest will not capitalize. The interest is therefore not accumulating interest.
My goal is to pay off all the student loan interest before I graduate so it does not capitalize.
I am debating between two strategies.
- Pay off the student loan interest gradually over the next three years, aiming to have none left when I graduate.
- Invest the money I would have used to pay off interest. Then in three years, use the investment to pay off all the interest.
I am leaning toward (2).
With (1) I get to use my interest payments as tax deductions each year, which is only valuable if it bumps me into a lower tax bracket. [Incorrect, as noted by @jmg229 below.]
With (2), there is risk that my investment will actually be smaller in a few years. But with relatively safe investment (like bonds?), even a low-yield investment will probably pay some interest above inflation. Since the student loan interest is not itself accumulating interest for the next three years, it seems like investing makes more sense than paying it off now.
It is relevant that the amount of interest is large enough that I could not feasibly pay it all off and start paying off principle soon.