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I hear people talking sometimes about how they’re not paying off their student loans because the interest rate is so low that it’s not worth worrying about. Something about that just seems off to me, so I spent some time with a few calculators to puzzle it out.

Due to the magic of compound interest, if you have $10,000 upfront and invest it at 8% per year instead of paying off your $10,000 student loan that you JUST took out at 6% interest, you will end up with $46,610 total at the end of 20 years, which is more than you would end with if you’d paid the loan off upfront and invested the amount you would have paid over 20 years toward the loan each month. In that example, investing the $10,000 instead of paying off the student loan makes sense.

But how realistic of a scenario is that? How many of the people saying that they’re not worried about the loan because of the low rate have actually invested the total amount that they’ve borrowed at the same time that they borrowed it? At a guaranteed 8% return per year? That they’ve gotten every single year in a row for 20 years? I’m sure some people have, but I haven’t met them.

I think a more likely scenario is this. Joe Student takes out a student loan for $10,000 at 6% interest. 4 years go by while he’s not worried about it. After 4 years, he still owes $9,123, but has diligently paid $3,438.72 toward it. During those 4 years, he also bought a house and managed to pay off the credit card debt he racked up in college, so his only debt beside the mortgage is the student loan. One day he gets a $5,000 windfall and thinks, “Hm, should I pay this toward my student loan? Nah, that’s at such low interest rate it’s not even worth worrying about.” He decides to treat himself by spending half the money and invests the other half responsibly. 16 years later, his student loan is paid off (to the tune of $17,194.84) and he’s got $8,565 in the bank from that $2500 investment that managed to earn 8% every single year for those 16 years. He’s relieved that he finally doesn’t have a monthly student loan payment anymore, and thinks about getting a new car with the extra money.

Of course that’s not a completely realistic scenario either, but if he HAD worried about that 6% interest, chances are he would have paid off the loan early. And, maybe he’d have been so aggressive about doing so that he realized that “hey, if I can live on $866.66 less than I thought every month, maybe I should invest that when I get done paying off this loan next year”.

Even at an abysmal 3% rate of return each year, $866 invested every month amounts to $265,237 after 19 years. At the magical 8%, it’s $449,154. Which is a whole lot more than $8,565, or even $46,610. Maybe investing $866 every month isn’t realistic either, but interest IS worth worrying about, both on the paying and the earning ends.

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