Pay off student loans early or invest? Compare the loan rate with your expected return

By DecisionSheet · Updated October 1, 2026 · 2026 tax figures

Every extra dollar paid on a student loan stops interest at the loan's rate, guaranteed. Every dollar invested earns whatever the market returns, which is not known in advance. So the comparison comes down to one number: the market return at which the two come out level. DecisionSheet's mortgage calculator finds it for any fixed-rate loan, and a student loan amortizes the same way a mortgage does. Run on a $30,000 loan over 10 years, the break-even is 4.07% at a 4.00% rate, 6.72% at 6.52% and 8.38% at 8.07%.

Three things can matter more than that comparison: an employer match, the tax deduction on student loan interest, and whether a federal loan might be forgiven. They are covered after the numbers.

The example

• The loan. $30,000, fixed rate, 10-year standard repayment.
• The rates. 6.52% and 8.07% are the fixed rates on federal Direct Loans first disbursed between July 1, 2026 and June 30, 2027, for undergraduates and for graduate students; Direct PLUS loans are 9.07% (Federal Student Aid, GENERAL-26-33). 4.00% is an illustration of an older or refinanced loan, not a published rate.
• The spare money. $300 a month, either paid toward principal or invested.
• The return. The calculator's default 8% and its "Conservative" preset of 6%, each an assumption held constant for all 10 years.

The calculator follows both paths for the loan's 120 months. On the prepay path, the $300 goes to principal until the loan is gone, after which the freed payment and the $300 are invested every month. On the invest path, the loan runs its full term and the $300 is invested every month. Both spend the same money each month, so the comparison is which account is larger at the end.

The calculator was built for mortgages and asks for a price and a down payment; the loan is the difference. Enter a price of $100,000 and a down payment of $100,000 minus your balance ($70,000 here), and leave property tax and insurance at zero.

Three rates, two returns

Open each case: 4.00%, 8% · 4.00%, 6% · 6.52%, 8% · 6.52%, 6% · 8.07%, 8% · 8.07%, 6%.

A positive figure means investing ended ahead; a negative one, prepaying. The pattern follows the break-even row:

• 4.00%. The break-even, 4.07%, is below both assumed returns, so investing ends ahead at both: by $4,970 at 8% and $2,229 at 6%.
• 6.52%. The break-even, 6.72%, falls between the two returns. Investing ends $1,692 ahead at 8%; prepaying ends $868 ahead at 6%.
• 8.07%. The break-even, 8.38%, is above both returns, so prepaying ends ahead at both: by $508 at 8% and $2,943 at 6%.

The dollar amounts are small. A 10-year loan does not leave long for either path to compound, and the largest gap in the table is $4,970. The calculator calls any finish within $2,000 of level a neutral result, and three of the six cases land there. For a loan this size, the choice matters less than the reasons below, which can each move it by more.

The chart shows the 6.52% loan at 6%. The prepay path holds nothing in the account until the loan is gone after 4 years 7 months; from then on it invests the freed payment plus the $300, and finishes $868 ahead.

Take the employer match first

A 401(k) or 403(b) match is paid on the contribution itself. A match of 50% of each dollar contributed is a 50% return on the day the money goes in, before any market return, and no loan rate in this table, nor the 9.07% PLUS rate, comes close to it. Contributing enough to receive the full match comes before any extra loan payment. Check the plan's vesting schedule: a match that is forfeited on leaving before it vests is worth less to someone likely to leave.

The student loan interest deduction

Interest on a qualified student loan is deductible up to $2,500 a year. It is an adjustment to income, so it applies whether or not you itemize (IRS Topic 456). Married people filing separately cannot take it. For 2026 the deduction phases out for modified adjusted gross income between $85,000 and $100,000, or $175,000 and $205,000 on a joint return (Rev. Proc. 2025-32, section 4.29).

When the deduction applies in full, each dollar of interest costs a dollar less your marginal tax rate, and so each dollar of interest a prepayment avoids is worth that much less. Take a single filer with $75,000 of modified adjusted gross income, below the phase-out, whose taxable income sits in the 22% bracket. The 6.52% loan's first year of interest, $1,891, is under the $2,500 cap, and every later year's is smaller, so all of it is deductible. After tax the loan costs about 6.52% × (1 − 22%) = 5.09%.

Entered at that rate, the calculator's break-even drops to 5.21%, and at 6% investing now ends $931 ahead instead of $868 behind. Open this scenario.

Two cautions. The investment side can be taxed too: in a taxable account, the return after tax is lower than the figure entered, which pulls the comparison back toward prepaying. And the deduction stops helping above the phase-out, or on interest beyond $2,500 a year; for those dollars the pre-tax rate is the real one.

Federal loans: forgiveness changes the question

The comparison assumes every dollar of the loan will be repaid. For federal loans that is not always so. Public Service Loan Forgiveness cancels the remaining balance after qualifying payments while working for a qualifying employer, and income-driven repayment plans can forgive a balance left after many years of payments (Federal Student Aid). Anyone on track for either should not prepay: an extra dollar paid only shrinks the amount that would have been forgiven.

Federal loans also carry protections private loans generally do not, such as income-driven payments, deferment and forbearance. Prepaying does not give those up, but refinancing a federal loan into a private one does. The repayment plans available have changed in recent years; check current terms with your servicer or at studentaid.gov before deciding.

Assumptions and limits

• Fixed-rate loan, interest charged monthly at one-twelfth of the annual rate, 10-year standard repayment from the start. No grace period, deferment, capitalized interest or variable rate.
• The expected return is a constant annual rate converted to an equivalent monthly rate. It is an input the reader chooses, not a prediction, and a real portfolio can lose money over a 10-year span.
• The table is pre-tax: no student loan interest deduction and no tax on investment returns. The after-tax scenario approximates the deduction by lowering the loan rate; the deduction arrives with the tax return, not with each payment.
• The paths are compared once, at the end of the loan's term. The model does not value having no debt sooner, or having cash available sooner.
• No prepayment penalty is modeled. The CFPB notes that "generally, there are no penalties involved in paying off your student loans early" (CFPB); check a private loan's terms.

Method and sources

The model is calculateMortgage in the mortgage payoff vs. invest calculator. The monthly payment is the standard fixed-rate amortization formula, the two paths are simulated month by month, and the break-even return is found by bisection against that same simulation. Every figure above is produced by running the model on the inputs in the scenario links. The deduction limits are read from the site's tax constants for 2026.

• Federal Student Aid, GENERAL-26-33, June 4, 2026: Direct Loan rates of 6.52% (undergraduate), 8.07% (graduate or professional) and 9.07% (PLUS) for loans first disbursed between July 1, 2026 and June 30, 2027.
• Rev. Proc. 2025-32, section 4.29: the 2026 phase-out ranges for the $2,500 student loan interest deduction.
• IRS Topic 456, Student loan interest deduction: the deduction is the lesser of $2,500 or the interest paid, is claimed as an adjustment to income, and is not available to those filing married separately or claimed as a dependent.
• Federal Student Aid: loan forgiveness and cancellation.
• CFPB: Can I pay off my student loan in full at any time?

Open this scenario in the calculator

All figures on this page come from the Mortgage Payoff vs. Invest calculator. Change any input there and the numbers update.