Should my daughter invest a $10,000 gift or pay off her student loans?

Dear Dave,

Our daughter is a student, and she has $10,000 in student loan debt. She works part-time, and has a couple of scholarships, but she has borrowed a little along the way to bridge gaps. Her uncle recently sold his business, and he told us he would like to give her a gift of $10,000. We’ve talked to her about this, and we’d like to guide her in the smartest possible direction. Should she begin planning for the future, and use this gift to start investing, or should she use it to pay off her student loans?

Gilbert

Dear Gilbert,

I really appreciate you two trying to help your daughter do the very best thing with her finances and her future. Her uncle sounds like a pretty generous guy. So, let’s take a minute and give this situation a good look.

We’ll start by pretending she doesn’t have any student loan debt. In a case like that, would it be wise for her to borrow money on a student loan in order to invest? Of course not. It’s a dumb question, but I want to get you thinking. If you don’t pay off the loans, and invest it instead, it’s just like you borrowed money to invest. See what I mean? That would be a pretty bad plan.

In my opinion, your daughter needs to get her student loan mess cleaned up as soon as possible. And this gift from her uncle represents the perfect opportunity to do just that. Listen to me, Gilbert. The last thing in the world your daughter needs is big pile of debt waiting on her when she gets out of school. I want her to start investing at some point down the road, but she’s just not in a good position to be an investor right now. She needs to pay off all those student loans. I’m talking about wiping out all that debt the minute she gets this wonderful gift in her hands.

And the second after she pays off those student loans, she should get to work on saving a pile of money, so she can complete her studies without racking up any more debt!

— Dave

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