Washington money writer can afford to pay off his student loans, but he won't. How to know if his logic works for you

Ryan Ermey, a senior money reporter at CNBC Make It, is flush with cash but recently admitted that he’s not planning to pay down his student loan any time soon.

That’s even though he hates owing money — and his only outstanding debt is his student loan, on which he’s made minimum payments since graduating in 2013.

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As he wrote in CNBC Make It, up until recently, he’s put any extra savings into investments (1).

But now love has driven him to switch up his financial strategy. Ermey needs to save up for his 2027 wedding.

That involved selling some stocks and reducing his retirement contributions. That’s why he currently holds a lot of cash.

Ermey considered using some of that cash to pay off his student loan, which has an interest rate of 6.55%. If he keeps making automated, minimum payments, the loan will not be fully paid until late 2027.

He realized that if he paid off his student debt now, it would erase his monthly loan payments and he could use that freed-up money to reach his wedding fund goal on time.

It was tempting, but here’s why he decided to stick with minimum payments, even with several experts encouraging him to pay off the loan now.

The return on paying off debt versus investing it

Ermey asked several certified financial planners for their opinions and most agreed it was a good idea to pay off his student loan with the 6.55% interest; his savings account is only earning 3.4% interest annually.

“If you have the funds available, paying off the loans first is a smart move,” MaryAnne Gucciardi, a CFP with Wealthmind Financial Planning, told Ermey.

“That’s a guaranteed 6.55% ‘return,’ which is higher than what you’re likely earning in even the best high-yield savings account.”

Read More: Are you richer than you think? 5 clear signs you’re punching way above the average American

There’s even a stronger motivation to pay down credit card balances.

Let’s say you owe $1,000 at 20% interest on your credit card (3). You’ll pay $200 in annual interest. But if you pay off the debt, you’ll have $200 more at the end of the year.

Can you get the same guaranteed 20% return in the stock market?

Over the past 30 years, a U.S. portfolio of 60% equities and 40% fixed income has had a 7.1% return, and even a fairly aggressive portfolio invested 100% in the S&P 500 would have had a 10.5% return over this time (2).

That’s why for many people, paying down debt first makes the most sense.

But here’s the thing. Ermey has been paying off his student loan for 12 years, so he’s at the point where he’s chipping away at more principal than interest, moving closer to paying off his balance.

As such, he estimates that he’ll only save $400 to $500 in interest if he pays it off now.

Moreover, some advisors he spoke to pointed out that he’d lose liquidity if he pays the debt. Once money is paid on the student loan, it’s no longer available to Ermey.

This could make it more difficult to weather financial difficulties or unexpected expenses.

The ebb and flow of liquidity needs

Ermey’s choosing liquidity because right now he values it more than what it will cost in terms of interest on his student loan.

The amount of liquidity you need will change based on your life circumstances.

While everyone should have a relatively liquid emergency fund that can cover three to six months of expenses, most people will need extra cash for certain life events — such as getting married, buying a house or sending a child to college.

The price you’re willing to pay for this liquidity is a personal choice and may also change over time.

Liquidity is a balancing act. The more cash you have in high interest savings accounts or checking accounts, the more investment return you’re likely to give up.

But if an unforeseen event forces you to sell stocks at the wrong time or pay penalties to redeem a certificate of deposit early, you can also incur costs for turning investments into liquid assets.

You may want to work with an advisor to anticipate future liquidity needs and invest accordingly to inflict the least damage on your longer-term goals.

After all, your money should help you live now — not just in the future.

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CNBC Make It (1); JP Morgan (2)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.