Author Topic: Retirement Savings vs. Student loan Payoff  (Read 2645 times)

wtrfre

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Retirement Savings vs. Student loan Payoff
« on: December 17, 2014, 11:35:34 AM »
What should I consider when debating whether to put money toward student loans or retirement?
Late starter here on retirement savings.
I will be back with more detail as necessary later, but I wanted to get this post up and running while I have the chance.
Thank you!

nereo

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Re: Retirement Savings vs. Student loan Payoff
« Reply #1 on: December 17, 2014, 11:41:36 AM »
we really could use a sticky for this question...

Basically, it comes down to what your SL interest rates are, and whether you are more likely to 'beat' that interest rate over the long term by investing it rather than paying down your loans. 

Personally, if the SL interest rate is below 4%, i'd recommend just paying the minimum and investing the difference.  If it is >6% then don't save anything until the loan is payed off.  Between 4-6% it gets down to your personal comfort zone and how much you stand to gain from investing in tax-advantaged accounts (e.g. 401(k) or tIRA).

TomTX

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Re: Retirement Savings vs. Student loan Payoff
« Reply #2 on: December 17, 2014, 11:54:51 AM »
Yup. Use the search.

MrFrugalChicago

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Re: Retirement Savings vs. Student loan Payoff
« Reply #3 on: December 17, 2014, 11:57:00 AM »
Personally, if the SL interest rate is below 4%, i'd recommend just paying the minimum and investing the difference.  If it is >6% then don't save anything until the loan is payed off.  Between 4-6% it gets down to your personal comfort zone and how much you stand to gain from investing in tax-advantaged accounts (e.g. 401(k) or tIRA).

This except that no matter your SL interest rate, always retirement save up to employee match

Catbert

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Re: Retirement Savings vs. Student loan Payoff
« Reply #4 on: December 17, 2014, 12:14:54 PM »
I would also consider how long it will take to pay off your SLs because once the year is up for IRA/401k you never get the chance to catch up on that missed contribution.  So for an easy example, if you could pay-off SL in 2 years at one payment level or 1 year if you pass up retirement contributions then I would opt for the 2 year SL pay-off in order to make retirement contributions.  Deciding where the trade-off is when its a longer period of time.

Also consider whether your SL payments are tax deductible in your situation.

nawhite

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Re: Retirement Savings vs. Student loan Payoff
« Reply #5 on: December 17, 2014, 01:13:44 PM »
Well, the interest rate is a consideration, but it is pretty low on my list.

1. Does your employer match 401k Contributions?
2. Are you eligible for the Savers Credit on your federal taxes?
3. What's your effective tax rate overall?
4. Are the Student Loans private or federal?
5. What is your income (i.e. do you qualify for the Pay As You Earn repayment plan)?
6. What is the interest rate?
7. What is my current asset allocation compared to what I want it to be (for example, I own a house but the home equity is more than 50% of my net worth. I'd rather that be a smaller percentage so I'd want more money in the stock market).

So for me personally, I have ~$70k in student loans but a fairly high income (and thus a high effective income tax). My employer matches the first 3% of 401k contributions so that definitely comes before student loans.

After that, money I put in Traditional Accounts and 401k's is tax free so I get like 32% off anything I put in those accounts. So personally, I max all my retirement accounts before I put money towards the student loans. I'd probably think differently if my loans were 8.5% APR loans but they aren't.

Prairie Stash

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Re: Retirement Savings vs. Student loan Payoff
« Reply #6 on: December 17, 2014, 03:24:01 PM »
One point for me was flexibility. Sometimes simplicity has its advantages, nothing is simpler than no loans.

By repaying my SL's early I decreased my monthly expenses. Luckily I had 4 loan so I could pay one off at a time, getting immediate benefits. At the time I was new in my job, lower job security etc. so I was readying myself for layoffs/firing/quitting.