Author Topic: Should I contribute to 401k with Student Loan Debt?  (Read 6653 times)

Sukotto

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Should I contribute to 401k with Student Loan Debt?
« on: May 22, 2015, 03:20:46 PM »
Hi guys, new to the forum!

Simple question I suppose. I have about $40k in student loan debt(interest rates from 4-6.5%) that I'm aggressively trying to pay off. So should I contribute(a lot) to my work 401k? Currently I hardly contribute anything, $100 a month just about, because I'd like to focus on paying the debt off. There is no employer match either. I have my sights set to have the loans paid off in 2 years.

So should I keep paying the loans aggressively and wait to contribute more to the 401k? Is patience a virtue in this case? Or should I think about the future after my debt and contribute a bit more and dial back the loan payments a bit?

Thanks guys!

MDM

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #1 on: May 22, 2015, 03:36:42 PM »
Simple question I suppose. I have about $40k in student loan debt(interest rates from 4-6.5%)
So should I keep paying the loans aggressively and wait to contribute more to the 401k?
If you expect to be in the same or higher marginal tax bracket in retirement as now, you might pay the 6.5% loan and flip a coin on the 4%.  You are comparing guaranteed (lower) returns from paying the loan vs. speculative (higher) returns from investing.  The higher the guarantee, the more attractive.

If you expect to be in a lower tax bracket in retirement, max the 401k and pay the minimum on the loans.  Now you have the added advantage of the tax break on the invested amount.

The above are gut feel responses - you could run the numbers to double check.

Cheddar Stacker

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #2 on: May 22, 2015, 05:02:02 PM »
Welcome to the forum!

I would pay down/off anything at the high end of that scale. Once you get it a bit lower, and maybe have one or two loans totally paid off and get some increased cash flow, change gears and start plugging the IRA/401k.

But tax rates are a big part of this as well. If you are in/above the 25% bracket, don't pass up the tax savings from the 401k. If you are 15% tax bracket or lower, the guaranteed 6% return on the loan makes more sense.

OneCoolCat

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #3 on: May 23, 2015, 09:12:26 AM »
I had the same question when I was new to the forum.  I was recommended to refinance my student loans to a lower rate and aggressively invest in my IRA/401k, and I did just that.  I started with 47k in student loans in January 2015 at a 6.5-6.8% interest rate.  I refinanced with sofi and got down to an adjustable 3.8% rate.  Since then I have maxed both my 2014 and 2015 IRA's, am set to max my 401k this year, and am throwing every other dime I can scrap up toward my student loans.  DRB and commonbond are other lenders that do refinancing, check with all three to see who gives you the best rate.  You lose PSLF, IBR, and PAYE if you refinance so if you rely on any of these three programs, don't refinance.

StacheInAFlash

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #4 on: May 23, 2015, 10:40:33 AM »
I'm in a similar boat with trying to pay down the student loans while still save for retirement. My vote is to keep making your 401K contribution...if nothing else, it is good motivator to see your savings increase, as it is more rewarding to look at then loan values decreasing.

forummm

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #5 on: May 23, 2015, 10:52:51 AM »
I'm with cheddar. But I would also be super frugal, and pay off as much of the highest interest loan as possible while maxing out the 401k.

I like to focus on just one of the loans, to pay it off in full quickly. Then my minimum payment drops, in case I need to stop early payments on loans for some reason. It feels more fun to me too. There are more intermediate goals. "Yeah, I paid off that loan, so I'm done with 2 of 8" If multiple loans are at the highest interest rate, I'll pay the smallest one of those off first.

Sukotto

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #6 on: May 24, 2015, 02:25:27 PM »
Thanks for the replies guys!

I'm indeed in the 25% tax bracket, I'll try to pay off one more loan and make some extra payments here and there and I'll try to contribute more.

Sukotto

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #7 on: May 27, 2015, 12:35:02 PM »
On a related note, would it be a good idea to open an IRA or an investment account? Or would I be spreading myself to thin?

Bob W

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #8 on: May 27, 2015, 12:54:19 PM »
Here is my take --

Student loan debts are forgivable if you die or are disabled.  You would be surprised how many people become disabled each year.  The government is assuming this risk. 

So the smart thing at your low rates is to pay the minimum or even defer the student load debts if possible.

I know Dave Ramsey and lot of folks here hate the idea of debt but that debt is a sunk cost.   Just because it moves to another side of the ledger doesn't mean you didn't already spend the money. 

So to please yourself psychologically max out 401K,  HSA, and IRAs.  Also save aggressively in other accounts.  If you like you can label one of the accounts paid off student loan debt.   Once you get to the 40K have a little party but don't actually pay off.  Continue to milk that low interest rate and let them carry the risk of disability or death.

Here is the simple math   40K at 4%  vs.  40K invested at an average of 9%.   The spread is 5%.

If you amortize that over 40 years that spread difference represents  something like $250,000.  So the question should really be  --- "would I rather have $250,000 more dollars in 40 years or would I like to pat myself on the back for paying off a 4% loan?"  What about your children?  Which would they rather have?  Zero or 250K?

Alternatepriorities

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #9 on: May 27, 2015, 02:27:55 PM »
I was faced with that question when I started working a decade ago. I consolidated the loans at 6% which I could write off against a 25% marginal tax rate effectively making it 4.5%. I decided mutual and (since MMM) index funds would beat that over the long run and focused on investing. Eight years in I took advantage of a company downturn to spend a year traveling the world. The investment gains effectively matched the cost of the trip. I worked for another year and then took another mini retirement to bike around Alaska. I'm working this year and I'll max out my 401k again but I also decided I was tired of having a loan so I paid it off last week!

jackiechiles2

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #10 on: May 27, 2015, 03:04:44 PM »
Here is my take --

Student loan debts are forgivable if you die or are disabled.  You would be surprised how many people become disabled each year.  The government is assuming this risk. 

So the smart thing at your low rates is to pay the minimum or even defer the student load debts if possible.

I know Dave Ramsey and lot of folks here hate the idea of debt but that debt is a sunk cost.   Just because it moves to another side of the ledger doesn't mean you didn't already spend the money. 

So to please yourself psychologically max out 401K,  HSA, and IRAs.  Also save aggressively in other accounts.  If you like you can label one of the accounts paid off student loan debt.   Once you get to the 40K have a little party but don't actually pay off.  Continue to milk that low interest rate and let them carry the risk of disability or death.

Here is the simple math   40K at 4%  vs.  40K invested at an average of 9%.   The spread is 5%.

If you amortize that over 40 years that spread difference represents  something like $250,000.  So the question should really be  --- "would I rather have $250,000 more dollars in 40 years or would I like to pat myself on the back for paying off a 4% loan?"  What about your children?  Which would they rather have?  Zero or 250K?

Agree 100%. 

MsPeacock

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #11 on: May 27, 2015, 03:20:05 PM »
Here is the information on social security survivor benefits for children:

http://www.ssa.gov/pubs/EN-05-10085.pdf

If your nephew's father worked at all "over the table" it is probably worth at least your sister and nephew both applying for benefits.


Sukotto

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #12 on: May 27, 2015, 03:31:55 PM »
Here is my take --

Student loan debts are forgivable if you die or are disabled.  You would be surprised how many people become disabled each year.  The government is assuming this risk. 

So the smart thing at your low rates is to pay the minimum or even defer the student load debts if possible.

I know Dave Ramsey and lot of folks here hate the idea of debt but that debt is a sunk cost.   Just because it moves to another side of the ledger doesn't mean you didn't already spend the money. 

So to please yourself psychologically max out 401K,  HSA, and IRAs.  Also save aggressively in other accounts.  If you like you can label one of the accounts paid off student loan debt.   Once you get to the 40K have a little party but don't actually pay off.  Continue to milk that low interest rate and let them carry the risk of disability or death.

Here is the simple math   40K at 4%  vs.  40K invested at an average of 9%.   The spread is 5%.

If you amortize that over 40 years that spread difference represents  something like $250,000.  So the question should really be  --- "would I rather have $250,000 more dollars in 40 years or would I like to pat myself on the back for paying off a 4% loan?"  What about your children?  Which would they rather have?  Zero or 250K?

Thanks Bob, that makes a lot of sense to me. I've always wondered why you should pay off loans if you can make minimum payments and have the extra money grow at a higher interest rate in other accounts. And you can have even more money in the future, sounds like a win-win. Is it just the idea of guaranteed returns on the interest of the loan?

To verify, I have a couple loans at 6.5% but I've been wanting to refinance them soon, most likely through Sofi.

Here's an actual breakdown of the loans (three accounts to make payments to)

$3,600 @ 4.27

$4,867.19 @ 3.375%
$11,541.28 @ 4.000%
$5,589.23 @ 6.000%
$4,708.40 @ 6.750%

$3,482.73 @ 5.350%
$4,256.54 @ 4.250%
$1,744.92 @ 6.550%
$1,704.57 @ 6.550%

« Last Edit: May 27, 2015, 03:33:57 PM by Sukotto »

dandarc

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #13 on: May 27, 2015, 03:34:48 PM »
Here is the information on social security survivor benefits for children:

http://www.ssa.gov/pubs/EN-05-10085.pdf

If your nephew's father worked at all "over the table" it is probably worth at least your sister and nephew both applying for benefits.
Is this in the correct thread?  Reads like it belongs in Aushin's thread.

LadyStache

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #14 on: June 01, 2015, 12:54:11 PM »
If you are single and would have a modified adjusted gross income (MAGI) greater than $65,000, it would be beneficial to contribute the amount to the 401k that would help you optimize the student loan interest deduction on your taxes.

The deduction phases out when your MAGI is greater than $65,000 and is eliminated entirely when your MAGI is greater than $80,000.

For example, if you earn $80,000 per year and contribute at least $15,000 to your 401k, you can reduce your MAGI enough to qualify for the full deduction of the amount of interest paid, up to $2500.

Bearded Man

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #15 on: June 01, 2015, 05:59:34 PM »
I would. I bought a house paid in cash at 28 instead of paying off my student loans. The house has nearly tripled in value, I lived there "for free" for 2+ years and I've rented it out for several years at ridiculous profits for doing nothing. My student loan is almost paid off now anyways and it was the springboard for my involvement in real estate investing. I'm sure people thought I was crazy back then and I would have been scolded if I had posted about it. In the long run, I figured this was a better bet and it was. Remember, time is the most important factor in compounding. Oh if I had 100K at 18...

JustGettingStarted1980

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #16 on: June 01, 2015, 07:50:08 PM »
Hi guys, new to the forum!

Simple question I suppose. I have about $40k in student loan debt(interest rates from 4-6.5%) that I'm aggressively trying to pay off. So should I contribute(a lot) to my work 401k? Currently I hardly contribute anything, $100 a month just about, because I'd like to focus on paying the debt off. There is no employer match either. I have my sights set to have the loans paid off in 2 years.

So should I keep paying the loans aggressively and wait to contribute more to the 401k? Is patience a virtue in this case? Or should I think about the future after my debt and contribute a bit more and dial back the loan payments a bit?

Thanks guys!

Hello,

I just don't agree with Bob!  Pay the 40K off and move on with your life.  Remember that  a 6.5 % loan paid off is a basically a 6.5% guaranteed return (with no risk) for life! Who on this forum wouldn't sign up for that?

Also, are we really the kind of people who like to be on the dole for disability student loan discharge from the government?

kpd905

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #17 on: June 01, 2015, 08:56:47 PM »
I would pay off the higher ones at least. I had loans at 7.9%, so that was my first priority.  Now that I have refinanced to around 4%, I have started investing more while I pay them off.

Sukotto

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #18 on: June 02, 2015, 03:52:30 PM »
Thanks for the replies guys!

I'll most likely be paying off that $3600 loan fairly soon from savings. That will bring my payments down to $410/month and I'll put the savings into my 401k. Then I'll refinance the loans. Then I'll most likely play it by ear after that.  I'd like to open an IRA account soon but we shall see :)

« Last Edit: June 03, 2015, 12:04:40 PM by Sukotto »

Helvegen

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Re: Should I contribute to 401k with Student Loan Debt?
« Reply #19 on: June 04, 2015, 01:01:28 PM »
I would pay them off simply because if the shit hit the fan, you wouldn't be able to bankrupt them. 

The standard for having your student loans discharged for disability is high. There is also this too:

Quote
During any of the next three years, if you earn over 100% of the poverty guideline for a family of two, or if you get certain educational grants or a new Direct or Perkins loan, your discharge will be revoked and your loan debt reinstated.

http://www.nolo.com/legal-encyclopedia/canceling-student-loans-permanent-disability-death.html