Student loan payoff strategy comparison

Student loan strategy — interest saved vs opportunity cost

Three numbers settle the math:

1. Loan rate — the cost of carrying the debt
2. Expected investment return — the cost of NOT investing extra payment money
3. Time horizon — compounding favors longer

The breakeven rate

For a long-horizon investor expecting 7% real returns from index funds:

• Loan rate < 4%: invest extra money, pay loan minimum. Almost always wins.
• Loan rate 4-6%: split — pay slightly above minimum, invest the rest. Math is close.
• Loan rate 6-8%: lean toward payoff. Risk-adjusted, paying down a 7% guaranteed return often beats expected stock returns.
• Loan rate > 8%: pay aggressively. Few investments offer guaranteed returns matching this.

What the calc shows

• Aggressive payoff: months to clear at higher payment
• Minimum payoff: months to clear at minimum payment
• Interest saved: total interest avoided by paying aggressively
• Opportunity cost: investment gains forgone by routing the extra dollars to debt instead of an index fund

If interest saved > opportunity cost: pay aggressively. If interest saved < opportunity cost: invest the extra.

What this calc skips on purpose

• Tax deduction for student loan interest (capped at $2,500/year, phased out at higher incomes — usually small impact)
• PSLF / IDR forgiveness considerations (federal loans only — radically changes the math if you qualify)
• Refinancing — should be evaluated separately. Refinance to the lowest rate possible THEN run this calc

The behavioral consideration

Math doesn't capture: the psychological weight of debt, divorce/inheritance/job-change risk, the discipline required to actually invest the "extra" money instead of spending it. For many people, the certainty of debt-free is worth a few thousand dollars in foregone math optimization.