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A good return on investment

Chris Farrell Sep 16, 2011

Question: Hello — My wife and I together have ~$330,000 in student loans from professional school. I have $2,000.00 every month to save / invest / blow after all bills are paid. If I put that toward principal payments on the student loans, can I view that as being an investment with a return equal to the interest rate on that loan? Or should I think about it in some other way.

Example: The student loan with the highest interest rate bears interest at 8.5%. If I put $2,000 toward that, can I view that as making a $2,000 investment that returned 8.5% this year? If I can view it that way, that seems like a pretty good guaranteed rate of return, since those debts aren’t going away until I pay them. Thank you for your time. Tad, Georgetown, TX

Answer: I had to look several times to make sure I had read the student loan debt number right. You and your wife owe a lot for your professional education. Clearly, you’re also making the kind of income that justifies an investment of that sort. Good for you.

Your intuition is right. You’re earning an 8.5% return on investment when you pay down that particular loan. It’s a good use of the extra money every month, assuming you’ve set aside money for unplanned and planned expenses–the so-called emergency fund.

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