Choosing whether to pay off student loans or invest extra cash creates paralysis. A clear mathematical comparison resolves the dilemma without guessing.
Federal loan interest rates are set by statutory add-ons over Treasury auction yields under 34 CFR 685.202. To evaluate loan payoff against investing, calculate your tax-adjusted effective interest rate.
The federal student loan interest deduction is capped at $2,500 annually and phases out at higher modified adjusted gross incomes. Compare your effective after-tax loan rate directly against expected investment returns minus marginal tax and capital gains liabilities.
If your guaranteed after-tax debt return exceeds your net projected investment yield, debt payoff wins.
What interest rate cutoff do you use when deciding whether to pay off debt or invest?
