When a family in Vermont asked whether to use extra cash to pay down student loans or to save and invest, certified financial planner Doug Boneparth laid out a straightforward rule of thumb that can help households everywhere.
Know the cost of your debt
Boneparth says the first step is to compare the interest rate on any loan to the potential return you could earn by investing the same money. “If your loan’s interest rate is above 6%, using extra money to aggressively pay down the debt is compelling,” he explains. The reasoning is simple: the interest you avoid paying is a guaranteed, risk‑free return that is hard to match in the market without taking on risk.
When lower‑rate debt can stay
For loans with rates below 5%, the calculus changes. If you already have an emergency fund covering three to six months of living expenses, Boneparth recommends directing surplus cash into tax‑advantaged accounts such as a 401(k) or Roth IRA. Over the long term, those investments can outpace the modest cost of low‑interest debt.
Consolidation vs. refinancing
Boneparth also cautions borrowers to weigh the trade‑offs of federal loan consolidation and private refinancing. Consolidation can simplify payments but may extend the repayment term and increase total interest paid. It can also disqualify borrowers from income‑driven repayment plans or forgiveness programs. Private refinancing might lower the interest rate, but it permanently removes federal protections like deferment, forbearance, and forgiveness. “Know exactly what you’re giving up before you commit,” he advises.
Practical steps for families
- Identify the interest rate on each debt.
- Compare that rate to realistic investment returns.
- Maintain an emergency fund before accelerating debt payments.
- Consider the long‑term cost of extending loan terms through consolidation.
- Evaluate whether private refinancing aligns with your financial goals and risk tolerance.
Boneparth encourages anyone with questions to reach out via the CNN Savings Challenge email address, and he highlights resources for specific audiences. Women can contact Savvy Ladies, a nonprofit that offers free financial counseling and courses. Those struggling with gambling addiction can seek help from GamFin, which provides free one‑on‑one counseling in at least 17 states. Finally, the five‑day “Get Good with Money” challenge, hosted by financial educator Tiffany Aliche, offers a structured way to improve money‑management skills.
Bottom line
The key takeaway is to let the math guide your decision. High‑interest debt should be tackled first, while lower‑interest obligations can coexist with a robust savings and investment plan. By following this framework, families can reduce financial stress and build a more secure future.
Original reporting: KEYT (Ventura/Santa Barbara) — read the source article.
