Author Topic: Received a Raise--Max out 401K or pay it toward 100K in Student Loans  (Read 5260 times)

ferrosapien

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I face punch myself daily for the 100K in student loans (Most people call it going to work)

As the subject says, I just received a raise at work, and want to make sure I put the money to work for me as efficiently as possible.

After taxes at my current 401K contribution level I have an additional $600 a month to do "something" with.  This would chew some debt down nicely, but 60K has an interest rate of 3.5%, and 40K has a 5.5% rate.  Both are less than the 7-8% rate I would expect from the 401K over the next 27 years until I can access it.  I am also considering the tax implications of reducing my taxable income and getting some of my earnings back in April.

My gross salary is at 80K right now, but there is a chance that I will receive additional compensation starting in 6 months that would move us into the 28% tax bracket.  Ultimately, I suppose my question is, will the benefits of decreasing taxable income (and tax burden) while building 401K outweigh the reduced interest paid on the student loans?

EDIT--Thanks to everyone for the advice.
A couple of more details--I am married, my wife's gross salary is 52K and change.  I didn't know there was an earning threshold at which SL interest wasn't deductible.  Looks like I need to do some homework there.  That alone could be a good motivator to direct cash to the 401K....
My job is very stable, I am not worried about a layoff in the next 5 years. 
RE-Edit--
The interest deduction is maxed out at 2500 per year and phases out from 65K to 75K single, of 125-155K married adjusted gross income.  So, to maximize the benefit, we would have to drop our AGI to 124,999.  This would also decrease our overall tax burden.....   :)
« Last Edit: October 11, 2013, 04:18:02 PM by ferrosapien »

ToeInTheWater

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #1 on: October 10, 2013, 08:47:51 PM »
if it were me - and of course, it's not - i'd pay down the debt before ramping up the 401k.

b

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #2 on: October 10, 2013, 10:18:03 PM »
Beans and rice bro...that's a bummer :( at least the interest is deductible right?

bikebum

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #3 on: October 11, 2013, 12:23:59 AM »
The 3.5% interest rate is comparable to a low rate mortgage, and there is much debate on whether to pay off a mortgage early or invest. I think student loan debt is an above the line deduction, meaning you can deduct it AND get the standard deduction, which makes the effective rate lower.

I would probably prioritize it like this:

Pay off loan @5.5% interest
Max out 401k as long as you have good investment options
Pay off loan @ 3.5% interest

Remember that 7-8% is an estimate, but your loan rates are guaranteed. There are a lot of people smarter than me one here, so maybe you'll get some better advice.

chasesfish

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #4 on: October 11, 2013, 05:30:44 AM »
I'm in the camp of maxing out your 401k, then attacking those loans.  Have you exceeded the income threshold where the interest payments are tax deductible?

You'll get opinions both ways, because both answers are better than blowing that "extra $600" on a new Mercedes.

Vitai Slade

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #5 on: October 11, 2013, 05:41:01 AM »
Just some food for thought:

Remember you can ALWAYS pay down the loan faster, but you can't always put more into your 401k. There is a cap. If you have good investment options, I'd say put it all in the 401k to max it and then anything leftover come back and attack the loans with. The fact that the interest is deductible is a big benefit in your favor.

oldtoyota

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #6 on: October 11, 2013, 07:56:53 AM »
I lean toward the 401K because of the uncertainty of layoffs. Laying people off seems to be the new normal. If you lose your job, you won't have the opp to put money into a 401K. Like a pp said, you can always pay off your loans. I also like the idea of paying off the 5.5 first, then maxing out the 401K and then dealing with the 3.5 loan.


Kira

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #7 on: October 11, 2013, 08:00:05 AM »
I would max out the 401k because the tax benefits to you as a single person with a high income are enormous. You are paying the loan with after-tax money - I don't know what your paycheck looks like, but I am in the same tax bracket and maxing out my 401k costs me $400 per paycheck but I put $680 in the 401k.

willn

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #8 on: October 11, 2013, 08:10:29 AM »
I lean toward the 401K because of the uncertainty of layoffs. Laying people off seems to be the new normal. If you lose your job, you won't have the opp to put money into a 401K. Like a pp said, you can always pay off your loans. I also like the idea of paying off the 5.5 first, then maxing out the 401K and then dealing with the 3.5 loan.

To me that benefit is exactly offset by the fact that if you get laid off you don't want loan payments depleting your emergency fund while you get new work.

My advice, put in 401k just up to the match for free money, but anything above that goes to knock down the loans, asap.  Get debt free.

TrulyStashin

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #9 on: October 11, 2013, 08:17:42 AM »
If my memory serves, the deduction for SL interest ends once you make more than $75k and even if you can write it off, you can only write off a small fraction of it.  I have SL's too (more than you) and I put enough in my 401k to get my employer's match and send the rest to debt service so I can be free sooner rather than later.

dude

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #10 on: October 11, 2013, 09:22:38 AM »
Because you say you have 27 years to work, I assume you are fairly young.  As you surely know, TIME is the greatest factor influencing the miracle of compound interest.  A $600 investment now will likely yield a LOT more than 6% over a 27 year period.  Max the 401k now, start paying down the student loans when you make more money -- as it seems is in your future.  That's how I've approached my student loans, but then again, my rates are far lower than yours (@2.3%).  The 401k having been maxed out for a long time now, I've been doubling up on student loan payments, and they'll be gone in 5 years.

Numbers Man

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #11 on: October 11, 2013, 09:32:46 AM »
It all depends on whether your loans are fixed or variable. If they are variable, then pay the higher interest rate loan off as quickly as possible.

If your interest rates are fixed, then keep paying the regular payments on your loans and continue building up your 401(k) if you have already built up your emergency 'stache.

galliver

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #12 on: October 11, 2013, 09:42:45 AM »
I'm young (and lucky) enough to not have experience with debt of that magnitude; but also young (and unlucky) enough to not have experience with investments. That's my disclaimer.

I almost feel like if I couldn't decide and was getting advice from both camps that sounded reasonable...I'd split it. Maybe 50/50, maybe 30/70, whatever. But I'd reap some of the psychological benefits/security of paying down the loan, while also mathematically winning on part of the $600 by investing at the higher interest rate. And if I ever started feeling uncomfortable about that choice; hey, could always change it.

StarryC

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Re: Received a Raise--Max out 401K or pay it toward 100K in Student Loans
« Reply #13 on: October 11, 2013, 10:16:25 AM »
1) Assuming you have a relatively liquid emergency fund of 6 months of expenses, including loan payment minimums.
2) Assuming you feel like your job is relatively stable- no signs or rumors of impending layoffs, no reason to believe you as an individual will be fired, not a job based on commissions or anything like that.
3) Assuming you are now very close if not over the salary where you can no longer deduct student loan interest

What are your plans?  If you think your expenses are likely to increase and you won't be able to save as much in the future (having a family?) I would pay down the loans if I knew I could pay one of them OFF before that time.  That way you have more flexibility in your monthly expenses.  Looks like, conveniently, your highest interest loan is also the smallest.  Will adding $600 a month to the loan get you out of it within 5 years? 

However, if guessing at my future, it seemed like I was going to have these loans for 10-15-20 years almost no matter what, or my expenses would stay the same and my salary were going to increase, I'd max out the 401k.  You won't get this time back on gains, and in a bad scenario you could always withdraw the 401K money (at a penalty) to pay off a loan.  The loan payments, if they are federal, have some flexibility to get a deferment, IBR, Forbearance etc. if your income drops or disappears.  I'm fairly certain that if you keep your job, keep expenses the same and Max the 401k and pay off the loans later with additional raises, you'll have more money at the end. 

If the job seemed unstable, I'd save up a year or more of expenses.