NEW YORK (CNN/Money) - I hear all sorts of conflicting advice about whether one is better paying off using extra money to pay off student loans early or putting that extra money into investments. What do you advise?

-- Sara Chen, Houston, Texas

I'm not surprised you get conflicting advice on this issue. Truth is, there are several ways you can come down on it, depending on how you frame the choice. But I'm happy to tell you where I stand.

First, before you begin prepaying the loan or investing that extra money, I'd suggest you create a nice little cash reserve for yourself. I'm talking about stashing away three to six month's living expenses in a liquid and secure account, something like a money market fund.

This way, if you happen to get laid off or get hit with unexpected expenses, you have a cushion to fall back on that can help you meet your financial obligations, including those loan payments.

Once you've done that, then as a financial matter the question of paying off the loan early with your spare cash or investing that cash comes down to where you get the biggest bang for your buck. If you prepay the loan, you avoid paying interest you would otherwise incur. Your "return" is in your interest savings, and your rate of return is essentially the interest rate you pay on the loan.

With an investment, of course, your rate of return is whatever rate of gains your investment delivers. So the issue is really one of whether you feel you can earn a higher rate of return on your investments than the rate charged on your student loans.

I don't know what rate you're paying on your loans, but just for argument's sake let's say it's 6 percent. And, again for argument's sake, let's assume the interest on your loan is tax deductible. (The most you can deduct for interest on education loans is $2,500 a year, but that deduction can be whittled down depending on your income as well. For details, check out IRS Tax Topic 456 -- Student Loan Interest Deduction).

RELATED ARTICLES Learning the loan lesson Debt-free living: A dream come true? 5 pain-free ways to save

And let's further assume you're in the 27 percent federal tax bracket. (We'll ignore state taxes for simplicity's sake.) This means you're paying an after-tax interest rate of about 4.4 percent on your loan. So your effective rate of return on prepaying the loan is 4.4 percent.

So do you think you would be able to earn more than 4.4 percent after tax on your investments? There are no guarantees, of course, but I think that's pretty likely. Sure, you may not earn the 4.4 percent year in and year out. But over longer periods -- five or ten or more years -- I think it's a reasonable assumption.

You've also got to factor in how your investment gains are taxed. If you invest your spare cash in a 401(k), IRA, Roth IRA or other tax-deferred account, then the tax advantages of such accounts make it easier for you to beat the 4.4 percent pre-tax return on the loan.

Or, to put it another way, you can beat the 4.4 percent after-tax return even if your pre-tax return is a bit less than 6 percent. And even if you do your investing outside of tax-advantaged accounts, you should be able to arrange things so that some of your investment return, if not the bulk of it, comes in the form of long-term capital gains.

In that case, that portion of your gains are taxed at a top rate of 20 percent. That also boosts your after-tax return beyond what it would be if you were paying a 27 percent ordinary income rate, again making it somewhat easier for you got beat the 4.4 percent after-tax return.

Of course, if your loan rate is higher than 6 percent -- or a large portion of your loan interest isn't tax deductible -- then you'll need a higher rate of return on your investments to come out ahead of prepaying.

This isn't a slam dunk in the favor of the investing option, however. If you'd started doing this three years ago, you probably wouldn't be close to a 4.4 percent after-tax return. Assuming the rate on your student loan is fixed, then you pretty much know in advance what rate of return you'll earn (unless your tax bracket changes, which will affect your after-tax rate).

One other thing to consider is that there may be certain "psychic" benefits to just getting the damn loan paid off. You might feel better no longer having that obligation hanging over your head.

It could make you a little more adventurous in job choices, lifestyles, whatever, knowing you don't have to come up with that payment each month. It's hard to put a number on the neat feeling of having unshackled yourself from a debt or financial obligation. But it definitely has value.

So I recommend you crunch a few numbers and then give some thought to the value of being free of the debt. In the end, you may find that the best answer is to hedge your bets by taking both routes at once -- that is, using some of your spare cash to prepay the loan while investing some of the rest. You can think of it as yet another way of diversifying, which in my view is almost always a pretty good option.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged."