Should I Invest or Pay Off Debt? A Case Study

By Jimmy Turner, MD
The Physician Philosopher

Should I pay off my debt or invest?  This is one of the most common questions I receive.  Given that everyone’s situation is different, I thought that a case study might prove helpful to answer this question.

At the end of this case study, I provide some recommendations for what to do with your debt – and in what order – based on your student loan debt to income ratio.  Also, check out our great student loan refinancing deals!

Let’s dig in.

A Reminder about Conflicts

As a reminder, it is important to know where your advice is coming from and how the person giving you that advice gets paid.  Conflicts of interest are given at the beginning of every talk for a reason.  They can be powerful.  And they play a roll in the decision we are about to discuss.

For this case study, we are going to dive into a conversation that came up the other day with a good friend of mine.  The details of course have been altered somewhat in order to protect the innocent.  Essentially, my friend wanted to know if he should invest in a taxable account or pay off his debt.

The Scenario: Pay Off Debt or Invest?

Here are the circumstances of the discussion:

  • Both spouses are high-income earners.
  • They have a substantial amount of debt (lets just say > $400,000) at 3% interest.
  • They are currently making minimum payments on their loans. The loans should be paid off in ~15 years.
  • A financial advisor is involved who earns 1% AUM (Assets under management) fees.
  • Their advisor places them in actively managed funds with an average expense ratio around 0.8%-1%.
  • They are already maxing out their 403B/401K and doing a Backdoor Roth

Should my friend put the family income into a taxable account or use it to pay off the high student loan debt burden?

Conflicts of Interest and Added Costs

The answer to this question will vary greatly depending on who is providing the answer.

For example, a financial advisor who earns 1% on all the money they help manage will be immediately decreasing any income they earns by telling this couple to put their money towards the debt instead of into the taxable account they manage.

That’s not to say that a good financial advisor would do this.  There are good financial advisors out there. In fact, I keep a list of the good ones here for those who need a trustworthy financial planner.  You’ll notice that none of those that I recommend earn money from commissions or an Assets Under Management model.

By asked me what I thought of his advisor’s advice.  After all, my only conflict of interest is making sure my friend and his spouse made an intentional decision that was right for them.

A conflict of caring too much is probably not a conflict of interest at all.

Two sides: Paying Off Your Debt Versus Investing Your Money

There are reasonable people on both sides of this argument. We will call the first group the “Debt Destroyer” Group.  We will call the second the “Market Math” group.

Argument from the Debt Destroyer Group (Pay Off Debt!)

Paying off the debt provides such an emotional release.  It is like a heavy burden has been removed when you become debt free.  Also, when you are debt free, you can take whatever money you were putting into your loans and then put that into investment vehicles.

Plus, you’ll save the interest you would have paid and invest that, too!

Argument from the Market Math Group (Invest!)

The other group thinks: As long as we can leverage our debt and earn more interest in the market, that’s a win!  Those pesky 3% loans are costing us, but 3% probably isn’t hard to beat if we invest the money.  So, let’s just put the money into the market.

A Helpful Thought Experiment 

Speaking of math and numbers, let’s look at some of them from my friend’s situation above.

  • The cost of the financial advisor is 1%
  • The cost of the actively managed funds above is about 1%
  • Inflation rises on average 2-3% per year
  • The student loan payment provides a “guaranteed” 3% interest

Even if you are being conservative when combining these numbers, you should add my friend’s 3% when paying down his loans + 1% advisor fee + ~1% expense ratios.

That is a 5% guarantee towards building wealth by paying down his debt instead of putting money into a taxable account.

So, the crux of this decision is really the following.  How big of a gambler are you?

Do you think your market investments will easily beat 5% gains?

Which team would you be on?  The Pay Off The Debt Destroyer Team or the Market Math Team?

This is where personal finance gets personal.  Everyone might give a different answer. I personally sided with paying off your debt.

And here is why…

We’re Still Not Done…

What about all that interest my friend didn’t pay that he could then put into investment vehicles after the loans are gone?

Well, on $400,000 at 3% interest with minimum payments for 15 years he can anticipate accumulating about $100,000 in interest.

Instead, he could pay it off in two years, and save himself $90,000 in interest in addition to not having to beat 5% in the market.

Then he could take the monthly payment he was putting towards his debt + the interest he saved himself and invest the money wisely in his taxable account.

Now that sounds like a winning recipe.

Not Just an Emotional Argument

Being debt free is a huge mile stone.  So is being student loan debt free.

Whether being debt free is a big goal for someone is going to be highly personal and individualized.

Many people make the behavioral finance argument that getting rid of debt is the winning method because it teaches you better financial habits (not normalizing debt).  When you feel like debt is filthy, it makes it a little easier to want to be cleansed of it.

That said, the above numbers show that it isn’t simply an emotional or behavioral finance argument.

Dr. Cory S. Fawcett wrote a great book on Eliminating Debt for Doctors (I write a review here).  If you don’t hate your debt, go read that book.

Should They Invest or Pay Off Debt?

So, what should my friends do with their money?

I am all about intentional decisions.  The first decision my friends should make is to get rid of their AUM advisor who is pushing them into actively managed funds.  That decision alone would save them 2% each year.

Then, they would have a much tougher decision on whether to invest their money or pay off their debt.

Take Home: Pay Off Debt Algorithm

Here’s the outline that most people could follow to help them make the decision to invest or pay off debt. This is all based on your debt to income ratio (DIR).  For example, if you have $300,000 in student loans and your income is $300,000, then your DIR would be 1.  If you have $450,000 in loans and $300,000 in income, your DIR would be 1.5.

Room to Invest Your Money While you Pay Off Debt
Debt to income ratio (DIR) is <1 OR you are in PSLF
(i.e. $250,000 in debt with $300,000 in annual income)

  1. Max out your 401K/403B for both you and your spouse (if married) to at least receive all matches and contributions from your employer.
    1. Make the above in a pre-tax fashion so you can put extra post-tax money towards your debt.
  2. Max out any governmental 457 for you and your spouse, if you have one.
  3. Max out your backdoor Roth space for both you and your spouse (if married).
  4. If in PSLF, make minimum payments and max out other investment vehicles (taxable account, etc).
  5. If not in PSLF, privately refinance and use any extra money after Step 3 towards destroying your debt.

Paying Off Your Debt at All Costs
Debt to income ratio (DIR) is >1
(i.e. $450,000-$600,000 in debt; $300,000 in annual income)

  1. Make sure you take advantage of PSLF, if you can!  In this situation, starting PSLF now (if you’ve missed out on previous payments) may still be the best choice.
  2. Max our your 401K/403B for both you and your spouse (if married) to at least receive all matches and contributions from your employer.
    1. Make the above in a pre-tax fashion so you can put extra post-tax money towards your debt.
  3. Every extra dollar should go towards debt in this situation if you are not doing PSLF.
  4. See the step above this… every extra dollar towards debt.

So, what’s the answer? Ultimately, do both.  Invest your money. And, pay off debt!

You can obviously tell, I am on the Debt Destroyer Team.  Most of the time you should just pay off the debt.  Which team would you be on if you were my friend?  What would you advise that family to do?  Leave a comment below.



  1. Mouse

    Another takeaway: If you choose to use a financial advisor, use a fee-based advisor instead of one who is paid on AUM. It’s a quick and easy way to get rid of the conflict of interest, and for high income earners like those discussed in this post a fee based solution will probably save them a lot of money in the long run.

    P.S. I’m Team Debt Destroyer. You should make t-shirts.

    • ThePhysicianPhilosopher

      I am definitely not anti fee only advising. I think there are “good guys” and “good gals” out there trying to really help people without costing them millions.

      Debt Destroyer team, FTW!

  2. DA

    I think this question could be viewed as what should one do with the extra ~$14.4k per month that this couple has after making their minimum payment on their debt. This is assuming a monthly payment of ~$2760 (to pay down $400k in 15 years at 3%) with $17.2k in available monthly cashflow (to pay down $400k in 2 years at 3% as you suggested they could).

    Your argue to destroy debt because (a) debt free = goodness (a fine reason) and (b) avoid paying interest for ~13 years. No arguments here from point a – as we’re approaching things much in the way a ‘Debt Destroyer’ would – but I do want to play devil’s advocate as it relates to point b:

    While yes, it’s true that much in the way of interest will be avoided if loan payment is expedited, I would consider the opportunity cost of that decision. If the persons in question plan to work for at least 15 years – perhaps a big assumption – the loans will be gone using either repayment strategy. So to me, the true question is whether you’d rather invest $14,400 each month for 15 years or invest nothing for two years and $17,200 to invest for 13 years.

    What it boils down to for me is the investors will have a contributed ~$345k more than the debt destroyers and for the next 13 years, the debt destroyers will have an extra $2700 monthly contribution to try and catch up.

    And I’d also argue that inflation works both ways. While the investor’s gains have to be considered relative to inflation, so do the loan payments. A $2700 monthly payment in year 15 is not the same as it is in year 1. Citing your 2-3% inflation rate, you could make the argument that the inflation-adjusted rates on the student loans are 0-1%.

    In our case, we’ve chosen to focus on debt reduction (loans sub-3%) before contributing to taxable investment, but we do max tax-deferred contributions before extra principle payments on our student loan debt.

    • ThePhysicianPhilosopher

      I definitely have found reasonable people on both sides of this argument.

      The hard part is that this isn’t a decision about paying off debt versus investing in tax-advantaged space, which is an easy decision as long as your debt is not insurmountable.

      This couple maxes tax-deferred contributions before extra student loan payments as well. Maxed out 403B and 401K + backdoor Roth for each.

      The additional money would go into a taxable account (where gains are taxed at LTCG tax) or into paying off debt. Also, the long-term payment timeline limits any options of FIRE for this couple, should they choose to go that route. It doesn’t eliminate the option, but being “Financially Independent” does imply that you are debt free.

      I do agree that inflation needs to be considered either way, for sure.

  3. planedoc

    To put a slightly different light on it…which is the “least risky”?

    Recently I faced a choice…keep money in the market, or pay off a 3.5% mortgage….

    The calculus that made the most sense to me was ….if the market fell, the debt is still owed. The least risk was to pay off the mortgage. So I did.

    No doubt the math favors investing over paying off the mortgage…as long as the stock market continues upward. As William Bernstein said when asked where the market was heading…”how the h#ll do I know?”

    If you are debt-free, the vagaries of market movement, the Brownian movement of hospital administrators and other random financial factors are much less worrisome.

    I’m firmly in the “pay off debt” camp (after maxing out tax advantaged accounts).

    • ThePhysicianPhilosopher

      I like looking at it that way, too. It is a more guaranteed “return on investment” if you want to think of it that way.

      Once my loans are gone, I’ll likely take a mixed approach. Early payments to mortgage while I put money into our taxable account.

      But I am definitely a fan of filling up tax advantaged space first, then student loan debt, then taxable account.

      Mortgages are a hot button topic with lots of different opinions. I’ll cross that bridge when I get there and may come over to your side. I certainly know Cory Fawcett would agree with you, too!

  4. DA

    Another consideration is that it doesn’t have to be a binary decision. You could hedge by splitting between the two in some way. I think it would be totally reasonable to pay down debt aggressively while still making meaningful contributions to investments (beyond the tax-sheltered accounts). Also, there’s no reason the couple couldn’t make a lump sum payment and some point prior to or at the point of reaching financial independence.

    With student loans at this level (on the order of 3%), the arguments are very similar to those made for/against paying down a low interest mortgage.

    • ThePhysicianPhilosopher

      I agree to some extent. I am a hater of debt. So it’s not binary for me if the decision is close. Just get rid of it.

      If the decision heavily favors investing, I get that.

      They could make a lump sum using money that cost them 3% interest in addition to the long term capital gains taxes they would have to pay to do that.

      I like simple, personally.

    • ThePhysicianPhilosopher

      What we have done is hammered at debt (while investing 20% of AGI) until we got to the mortgage…now we are working on getting to 35% savings rate while we make minimum payments on the mortgage. Once we get there with automatic savings, we will consider throwing more money at the mortgage.

  5. Dreamcatcher

    Yes, definitely team Debt Destroyer. I had be eliminating debt for about 14 years (first credit card debt, then student loans, then car loans, so that all I had left was the mortgage) and putting about 20% into a mix of 401k, Roth IRA and taxable investments. Finally, in part due to a windfall from an inheritance, I paid off the mortgage (I had $30,000 left on it). I moved to 100% funding of the 401k and the Roth IRA (I am over 50) and saving $1500 a month in taxable investments and savings. This dates back to 2015. The math tells me that I would have better off if I had invested all of the inheritance (I invested most of it, there was plenty left after paying off the mortgage), but the psychological benefit of having no debt an owning my house outright was enormous. That was my moment of financial freedom and independence, everything since then has been gravy. I have a goal I am still working towards, but it is because I want to, not because I have to.

    • ThePhysicianPhilosopher

      Being debt free really does feel like financial freedom. We have now paid off all of our student loans and auto loans. Even doing that felt great!

  6. Dr. McFrugal

    Love your pay off debt algorithm. It was one of my favorite parts of the TPP book!

    I currently take a mixed approach. The only debt we have is our mortgage at 3.625%. (I’m not counting my wife’s student loan debt because she’s pursuing PSLF).

    So right now, we are putting some additional money into the mortgage principal. And some in a taxable account. I have to admit though, I do put more money in the taxable account. So maybe I’m slightly more in the market math group.

    But my approach would be totally different if we had credit card debt or other debt with high interest rates. If that were the case, then I’m team debt destroyer all the way!

    • ThePhysicianPhilosopher

      I am on the same page, DMF. When we got to the mortgage, we started playing for team math instead of team debt destroyer, too.

  7. Brent Lacey

    I’m definitely on Team Debt Destroyer. Debt = risk. Period. There’s no refuting that. When discussing the math of the choice, people often negate the risk associated with debt. Debt is a thief. Getting rid of it is always priority one. I love being debt-free!


    • ThePhysicianPhilosopher

      Yeah, I think there are reasonable people on both sides. And it can even change. I was on team debt destroyer until I got to our mortgage. Now I am on team math because I want the liquidity of the investments instead of money trapped in the house that I cannot use.

      And I may again switch back someday again!

  8. Dr. Cory S. Fawcett

    Thanks for the new ammunition for answering this question. Also thanks for the shout out for my book on Eliminating Debt. I’m adding this article to Fawcett’s Favorites this week.

    Dr. Cory S. Fawcett
    Prescription for Financial Success


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