Staring down the barrel of a loaded student loan balance, month after month, can be stressful. You’ve probably wished it would all just go away, and if you happen to have some sort of investment — say, stocks or savings bonds — you’ve likely asked yourself, “Should I sell my stocks to pay off debt?”
The decision to sell stocks to pay off debt (or to sell bonds or other securities) depends on the particulars of your situation. The most important factors to consider are the interest rate you’re paying on your student loans and the returns you expect to earn on your investments.
Generally speaking, it only makes sense to sell stocks to pay off debt if the cost of that debt outweighs the returns you’d get from your investments. Here are tips on how to figure out which will save you the most.
Know your interest rates before you sell stocks to pay off debt
How to estimate your return on investment
Accounting for tax penalties, costs of selling investments
Making the final decision on selling stocks to pay off debt
And what if you don’t sell?
The first step is to figure out the interest rate you’re paying on your student loans (or other debt). After all, the more costly your debt, the more urgently you’ll want to pay it off.
Your interest rate can be fixed, meaning it won’t change over time, or variable, meaning it may increase or decrease in the future.
Currently, all federal student loans have fixed interest rates. These range from about 4.5% to 7%, depending on the type of loan you have. The table below breaks down federal loan interest rates for 2019-2020.
|Loan type||Borrower type||Interest rate|
|Direct Subsidized Loans and Direct Unsubsidized Loans||Undergraduate||4.53%|
|Direct Unsubsidized Loans||Graduate or Professional||6.08%|
|Direct PLUS Loans||Parents and Graduate or Professional Students||7.08%|
Source: U.S. Department of Education Federal Student Aid office
If you have private student loans, on the other hand, interest rates can be variable or fixed, and those rates can vary pretty widely. Of course, if you have solid credit (or a cosigner), then you could always try to score a lower student loan interest rate by refinancing your debt.
To figure out your current interest rate and whether it’s fixed or variable, look at your most recent student loan statement. This information will help you determine the cost of your loan. You can use this student loan interest calculator to figure out how much money you’re paying in interest each month.
After determining the cost of your loans, you’ll want to figure out how much you stand to earn on your investments before deciding whether or not to sell stocks to pay off debt.
Look at what your investments have made in the past, and also consider historical trends. If you’re invested in the S&P 500, for instance, you’ll see that the average return from 1926 to 2018 was about 10% per year, though perhaps closer to 7% when adjusted for inflation. Individual stocks, meanwhile, can be less predictable, but heavily-traded blue chip shares are generally less volatile and risky than low-priced “penny stocks.”
Remember that any estimates you come up with are just that, and nothing is guaranteed. It’s best to err on the side of caution and go with conservative projections when guessing how much money you’ll make on your investments.
If you want to sell stocks to pay off debt, there is another cost to consider. Each time you sell an investment, you might have to pay capital gains taxes if that investment had a positive return.
As of 2019, short-term gains (held for less than one year) were taxed at your regular income-tax rate, which can range from 10% to 37%. Long-term capital gains (held for more than one year) are taxed at 15% for most people.
If you have investments held in retirement accounts, such as an IRA or 401(k) plan, it is generally a bad idea to sell to pay off debt unless you are facing foreclosure or default. In addition to robbing your future self of valuable retirement assets, you are stuck with a big tax penalty on every dollar you withdraw before retirement age.
For instance, an early withdrawal from your IRA would incur a 10% tax penalty on top of capital gains and income taxes. According to Fidelity, the total of taxes and penalties for early 401(k) withdrawals can approach 50% for high earners. And remember, all of this is in addition to giving up future gains in that account.
You’ll first want to look at your student loan interest rates and compare them to your expected rate of return from stock or other investments. If your rate of return is higher than the interest rate on your loan, you’ll probably want to keep your investment.
For example, let’s say you have $110,000 invested in a Vanguard S&P 500 index fund via a Roth IRA and a $100,000 student loan balance that you’ve refinanced to a 4.25% interest rate. Your investments earn 10 cents on every dollar per year tax-free, while your student loans cost you 4.25 cents for every dollar per year.
In other words, while it might be tempting to sell your investments and wipe out your student loan balance in one fell swoop, it’s probably wiser to leave your Roth IRA alone.
On the other hand, say you have $10,000 in student loans, and you’re paying an 11% interest rate. You’ve also got five stocks worth $2,000, each in a taxable investment account. And let’s say your research suggests you’re unlikely to earn more than 10% ($1,000 per year) on those stocks, while your loans are costing you $1,100 per year in interest.
In this situation, it’s likely smarter to sell those stocks and pay off your debt, depending on how your gains would be taxed.
You might also find yourself in a situation where you’ve identified an investment that you believe will probably make more money than your student loans are costing in interest. In that case, you could potentially free up cash by refinancing to a lower monthly payment or, if you have federal student loans, by switching to an income-driven repayment plan.
Of course, there are pros and cons to both of those options. While refinancing can decrease your monthly payment, and even your interest rate, you might not qualify. Also, refinancing federal student loans (rather than private loans) means giving up benefits like flexible repayment plans and potential loan forgiveness.
With federal loans, income-driven repayment plans can make your monthly payments more manageable, and you might even qualify for eventual loan forgiveness. However, you could also end up lengthening your repayment period and paying more in the long run. And if you do get loan forgiveness, it could be taxed as income in many cases.
Selling stocks to pay off debt can make sense in some cases, but it’s important to do the math first so that you know you’re making the right choice.
Elizabeth Aldrich contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 5.64%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.28%3||Undergrad & Graduate|
|1.89% – 6.77%4||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 5.61%5||Undergrad & Graduate|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective Sep 1, 2020 and may increase after consummation.