Dear DTA,
I have a lot of student loan debt. Over $50,000. But I feel like I’ve been missing out on big gains in the market by focusing on my debt. If the interest rate is low, shouldn’t I buy stocks?
-Carlos T.
Hi, Carlos.
Thanks so much for writing in. It’s always great to hear from our readers.
You have a very interesting question.
I can tell you that I was in a very similar predicament back when I first started investing.
This was back in early 2010.
I was in my late 20s and fed up with having no control in my life.
So I decided to get control over my life by gaining control over my finances.
If I could master my money, I could get rid of those mastering over me.
Mastering my money meant getting serious about budgeting, living below my means, and intelligently investing my capital.
Like you, I had a good chunk of student loan debt at this time.
My decision then was to make the absolute minimum payments on the student loans and focus on plowing my capital into stocks.
Of course, I’m not talking about any stocks.
I’m talking about high-quality dividend growth stocks.
Make sure to check out fellow contributor Dave Van Knapp’s Dividend Growth Investing Lessons.
Those lessons tell you what dividend growth investing is all about, why it’s such a phenomenal strategy, and how to successfully execute it.
I once had no control. Because I was broke.
Actually, I was below broke.
When I came upon that fork in the road, about 10 years ago, I was in debt.
But dividend growth investing changed my life.
By living below my means and investing in high-quality dividend growth stocks like those you’ll find on the Dividend Champions, Contenders, and Challengers list, I became financially free at only 33 years old.
I’m now retired in my 30s and living the life of my dreams!
The crazy thing is, I retired early in life without access to a college degree or high-paying career.
I lay out exactly how I did this in my Early Retirement Blueprint.
The dividend growth investing strategy is a major element of the Blueprint.
This strategy allowed me to build my FIRE Fund.
That’s my real-money dividend growth stock portfolio.
And it generates the five-figure passive dividend income I live off of.
With all of that in mind, Carlos, I want to share with you a number of points regarding my rationale.
My student loan debt was about half of what you have. I had around $25,000 in student loan debt when I first started down the path to financial freedom and early retirement.
Also, my interest rate was very low. Around 3%. And it’s also tax-deductible. I figured I could get a better ROI in the market than that guaranteed sub-3% return. Came down to opportunity cost, ultimately.
I also prefer liquidity. Once I send in that check to the Department of Education, the money is gone. As someone who really desired control over my life, I needed cash flow and liquidity.
There’s also the matter of flexible repayment terms. If I lost my job or somehow suffered a severe drop in income, I could go to the ED and get on an income-based repayment plan. This would greatly reduce my payments. Perhaps even to $0. I like that flexibility.
Lastly, I had to keep inflation in mind. By stretching out the payment terms as long as possible, knowing the long-term return of the stock market against my 3% interest rate, I figured I’d come out way ahead. The amount of the debt in real terms would slowly be chipped away by inflation.
Now, that’s just where I’m coming at it from, Carlos.
Your debt is twice as much as I had. If I had $50,000 in loans, I might have been a bit more aggressive with knocking down that debt.
I’m also not sure of your interest rate. If it’s higher than the 3% I’ve been working with, that will alter the math.
Furthermore, stocks are a lot more expensive today than when I first started. The valuations aren’t as appealing, broadly speaking.
What I will say is, there’s nothing like the peace of mind that comes with having little or no debt.
I personally couldn’t sleep well at night if I owed a lot of money.
It’s something that nags at you.
If I were you, I might take a balanced approach.
Get your lifestyle and budgeting in order so that you have plenty of cash flow to work with.
Then consider paying down those loans while also intelligently investing your capital for the long term.
They’re not mutually exclusive endeavors.
You can do both at the same time.
When you are ready to invest, make sure to follow my Undervalued Dividend Growth Stock of the Week series.
I release a quality dividend growth stock idea every Sunday.
I only share ideas that pass a number of fundamental and valuation hurdles.
These are basically the “best of the best” dividend growth stocks.
Regardless of what you decide to do, Carlos, I’ll leave you with my best piece of advice.
Start today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.