Student Loan Payoff vs Investing: A 10-Year Monte Carlo Simulation
The common advice isn't always right. We simulated both strategies with real US data.
The Setup
We modeled a 27-year-old US professional with the following profile:
- Annual income: $65,000 (growing 3% per year)
- Federal student loan balance: $35,000 at 5.5% interest
- Monthly disposable cash: $500 (after all living expenses)
- Emergency fund: Already has 3 months' expenses saved
Two strategies were tested over a 10-year horizon with 300 Monte Carlo iterations:
Strategy A: Aggressive Loan Payoff
Put the entire $500/month toward extra loan payments. After the loan is paid off (approximately 4.5 years), redirect all $500/month into a total US stock market index fund (Roth IRA + taxable).
Strategy B: Minimum Payments + Invest
Make minimum loan payments (~$380/month), invest the remaining $120/month into the same index fund from day one. After the loan is paid off on the standard 10-year schedule, continue investing $500/month.
Results: P10 / P50 / P90
What This Means
Strategy B has a higher median (+$67K vs +$61K) and a much higher upside ($98K vs $72K in P90). But its downside is significantly worse — $38K vs $52K in the P10 case.
This is the classic risk-return tradeoff that a simple calculator completely hides. If you just look at the “average,” investing wins. But if you look at the worst plausible outcome, paying off the loan first is safer by $14,000.
The Decision Score in Finasim gives Strategy A a 72/100 and Strategy B a 68/100 — because the risk-adjusted expected value slightly favors the guaranteed return of debt elimination.
When Investing First Makes Sense
- Your employer offers a 401k match (guaranteed 50–100% return on contributions)
- Your loan interest rate is below 4% (making the spread vs equity returns wider)
- You have high job security and won't need to liquidate investments in a downturn
- You're comfortable with short-term portfolio losses
When Paying Off First Makes Sense
- Your loan rates are above 6%
- You're risk-averse or value peace of mind over maximum returns
- You're in a volatile industry with uncertain income
- You don't have an employer match available
Run Your Own Numbers
Every person's situation is different. Finasim's “Student Loan vs Invest” template lets you input your exact balances, rates, and income to see your personalized P10/P50/P90 outcomes and Decision Score.