Should I Sell My Stocks to Pay Off Debt?

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Some of the most touted words of wisdom in personal finance are that it’s important to start investing as early as possible. Yet young professionals are struggling to start investing while still paying off student loans.

If you are paying down student loans – or any other debt – and are fortunate enough to already have some investments, you may be considering selling them to pay off your debt sooner. That could be a good decision, but there are several factors to consider before you hit the “sell” button.

Expected rate of return

Before selling any investments to pay off student loans or other debt, it is important to look at each investment, why you own it, and your expected rate of return.

Individual stocks, mutual funds, fixed-income (bonds), and real estate investments all behave differently. For one investment, you may expect to earn 5% per year, while another is projected to return 15% annually.

Clearly, the higher expected return is more valuable than the lower one, so if you do decide to sell something, make sure to start with the lowest returning investments first.

According to Warren Buffet, the smartest investment you can make is a low-cost S&P 500 index fund. Over a long time period, the S&P 500 typically returns 10% per year, or about 7% taking inflation into account.

Individual stocks are much less predictable. Even professional fund managers typically underperform the S&P 500; unless you are a rock star stock picker, assume your typical results will be the same or lower than the S&P 500 – and remember, you can’t predict what, exactly, those results will be.

The cost of your debt

Some loan interest rates are fixed, while others are variable. If you look at your most recent student loan statement, you can quickly find your current interest rate and whether it is fixed or subject to reset in the future.

Student loan interest rates for federal loans, which are fixed, range from around 4-7%, depending on the type of loan. The table below shows Federal loan rates for this school year.

sell stocks to pay off debt

If you have a loan from a private lender, average rates are typically around 9-12%. However, you might be able to refinance to a rate as low as 1.95% if you meet all the eligibility requirements.

Tax penalties and costs of selling investments

If you want to sell stocks to pay off debt, there is another cost to consider. Each time you sell an investment, you have to pay capital gains taxes if that investment had a positive return.

As of 2016, short-term gains are taxed at your regular income tax rate, most commonly around 25 percent. Long-term capital gains (held longer than one year) are taxed at 15 percent 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 percent 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 percent. And remember that in addition to taxes and penalties, you are giving up future gains in that account.

Do the math

No two people have identical loan and investment situations. If you want to sell assets to pay off debt, do the math for yourself before making a decision.

First, look at your loan interest rate and compare it to your expected rate of return on your investments. If you expect to get a higher return on your investment than the cost of your loan, you are generally better off keeping the investment.

Let’s take a look at an example of someone who is better off selling investments to pay off student debt.

Loan: Private student loan with an 11% interest rate and $10,000 balance.

Investments: Five stocks worth $2,000 each in a regular, taxable investment account.

In this situation, the expected annual return on the stocks is around 10% (or possibly lower due to the high risk of a non-diversified portfolio). Assuming a 10% return, the investor would earn $1,000 per year on these investments.

On the other hand, the cost of the loan is $1,100 per year. Selling the stocks to pay off the loan could be a smart decision, depending on how gains would be taxed.

Now, let’s look at an example of someone who should not sell assets to pay off debt.

Loan: Mortgage with 4.25% interest rate and $100,000 balance.

Investments: $110,000 invested in Vanguard S&P 500 index fund in a Roth IRA.

In this situation, it makes the most sense to look at the performance of each dollar, because the investor has enough in the IRA to completely pay off the loan with money to spare.

Each dollar borrowed costs 4.25% per year, or 4.25 cents. Each dollar invested earns 10% per year tax-free, thanks to the Roth, so each dollar invested earns 10 cents per year. Because the investment yield is higher than the loan cost, it is better to keep the funds in the IRA.

Should you sell stocks to pay off debt?

As you can see, there is no universal right or wrong answer. The key is understanding your own income, expenses, investments, and loans to make the best answer for your long-term financial success.

Whether you love budgeting or hate it, a budget is one of the best tools you can use to make a plan to pay off your loans. While you are trying to figure out what’s best for you, take a look at the invest versus payoff calculator to decide what to do with your next unbudgeted dollar.

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1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.