Pay off debt or invest? The interest-rate rule, and the two debts it does not settle
Paying off a 24% card is a 24% return, certain, tax-free. No investment offers that. Below about 6% the comparison stops being obvious, and the answer depends on tax and temperament.
Paying a dollar off a debt earns the debt's interest rate. It is the only investment with a return that is known in advance, cannot be taxed, and cannot fall. That sentence settles most of the question, and the rest of this guide is about where it does not.
The rule
$1,000 paid off a 24% card saves $240 of interest in the next year that would otherwise have been paid with after-tax money. No account offers 24% with certainty, so the card is paid first. The same logic makes an 8% car loan a stronger case than most expected investment returns, and a 3% mortgage from 2021 a weaker one.
Where the line is
Long-run stock market returns have averaged somewhere in the 7–10% range a year before inflation over long periods, with large swings in any given year and a fall of 50% or more roughly once a generation. Against that, a debt's rate can be sorted into three bands. The bands are a way of organising the question, not a rule.
| Debt rate | Examples | Comparison |
|---|---|---|
| Above 10% | Credit cards, store cards, payday loans, most personal loans | Repaying beats any reasonable expected return. Not close. |
| 6–10% | Car loans, private student loans, some federal graduate loans | Repaying matches or beats the expected return, with none of the risk. |
| Below 6% | Most mortgages before 2022, older federal student loans | The expected return is higher, but uncertain; the debt's cost is fixed. |
Tax changes both sides
- Investment returns are taxed, in a taxable account. A 7% return at 15% capital gains is 5.95%; interest income at 22% is worse.
- Some debt interest is deductible. Mortgage interest, for those who itemize — roughly one household in ten since the standard deduction was doubled in 2018 and made permanent in 2025. Student loan interest, up to $2,500 a year, subject to income limits. A 6% mortgage whose interest is fully deductible at 22% costs 4.68% after tax.
- A 401(k) match is not part of this comparison. An employer match is an immediate 50% or 100% return; it is claimed before any debt except the highest.
The two it does not settle
A low-rate mortgage. A 3% loan against a 7% expected return favors investing on the arithmetic, and the arithmetic has been right in most 30-year periods. It has also been wrong for stretches of a decade. What the arithmetic does not price is the value of owning the home outright before a job loss or retirement, and people price that differently.
Federal student loans. The rate is often in the middle band, but the loans carry things a car loan does not: income-driven repayment, forbearance, discharge on death or disability, and forgiveness programs whose terms have changed repeatedly since 2020. Paying them early gives up options with a value that depends on a future nobody can see.
On a $5,000 balance, a year of interest at 24% is $1,200. A year of return on $5,000 at 7% is $350, before tax and with no guarantee. The card wins by $850 with certainty. Illustrative; the point is the ratio, not the amounts.
Sources
- Topic no. 456, Student loan interest deductionInternal Revenue Service · checked Sep 24, 2026
- Topic no. 505, Interest expenseInternal Revenue Service · checked Sep 24, 2026