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Here's the question, should I open a Roth IRA and put about $200 a month into an S&P 500 index or should I try to pay off the interest on my sudent loans (i.e. so I don't fall deeper into the hole)

If it were just a choice of paying interest at 7.5% or putting money in the market, I'd say pay off the loans. Call me conservative, but a 7.5% guaranteed after-tax return sounds pretty good to me.

But there are several other factors to consider here.

(1) You can get a tax break for paying interest on student debt. (Basically, you can deduct the interest payments from your income, even if you don't itemize.) This break is phased out for incomes over $40,000, so you won't get it later. This means it is more attractive to make interest payments now.

(2) On the other hand, you won't be eligible for the Roth IRA later on, either.

Tough call. The tax break is for payment of up to $2000 in interest for this year and $2500 for subsequent years, so I'd pay that much in loan interest first. (Make sure to specify that the money is going toward interest, and make sure that your loan is a qualified student loan.) If anything is left, you might put it in a Roth.

-- Edmund Ross
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