Investing the money into index funds is an attractive option. Even if your degree requires slightly more student loans, the math says to take out a student loan at 3.2% rather than take on larger opportunity costs.
That said, I don't follow my own advice re: my mortgage since my wife and I like the idea of being debt free, opportunity costs be damned. Any of your listed options are good ones, and are way better than spending that money on lifestyle, vacations, cars, etc.
Sometimes using an inheritance in the way your family member might have approved of is a nice way to honor his or her memory, too. If he or she spoke highly of education as a worthy goal, you could use it towards your degree or student loans and know that your relative played an important role in that aspect of your career.