I am a 28-year-old college student with one more year left in my studies. I have a part-time job and rent an apartment with my brother. I have about $4,000 saved and I was wondering if I should invest this money or pay off part of my student loan with it before I graduate?–J. Kuria, Washington, DC
Like cholesterol, there’s bad debt and good debt–well, at least there’s not-so-bad debt. Fortunately, student loans fall into the latter category. Certainly, that’s not to minimize their significance. Over the past decade, the debt burden of graduating seniors more than doubled from $9,250 to $19,200 according to The Project on Student Debt, a nonprofit advocacy group. But the reason student loans are not so bad is that they carry a comparatively modest interest rate–6.8% on federal Stafford loans. Also, remember that up to $2,500 in student loan interest is tax deductable in years when you’re bringing home $50,000 or less.
So assuming that you don’t have any high-interest credit card debt (if you do, that should be your top priority) there’s something else to consider. Because an emergency could result in more debt if you’re not financially prepared, you should maintain three to six months of living expenses in an emergency fund.
These funds should be readily accessible, so you should look into liquid options such as savings or money-market accounts. With a financial cushion in place, you should then figure out an investing plan.
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