$145,000 in Student Loan Debt--Contribute to 401k?

[ReadySetMillionaire]

As the title indicates, I am $145,000 in student loan debt. This is $5,000 less than I started with when I got my job in December, so I am making decent progress towards getting rid of this debt.

I make $47,500 per year and I am eligible to begin contributing to my 401k starting in June (six months). My employer puts 3% in the 401k regardless of whether I contribute and does not exceed a 3% match. Thus, I do not need to contribute to receive this 3% match.

With so much debt, I'm wondering whether it's in my best interest to contribute to my 401k. Even if I just did the match (3% = $1425 gross), that's probably somewhere around $1000 net per year, which is basically equivalent to a student loan payment.

Thus, I think I shouldn't contribute until I'm done paying off my debt. What say you?

[Numbers Man]

The interest on that loan must be astronomical. I would concentrate on eliminating that loan. Any benefit that you get from matching and tax deferral probably doesn't approach the loan interest you are paying. I'm guessing you're paying at least $10k a year in interest based on that principal blance.

[SpendyMcSpend]

Yes I agree you should focus entirely on paying your debt off unless it's a really low interest rate (less than 4%)

[Jack]

Yes I agree you should focus entirely on paying your debt off unless it's a really low interest rate (less than 4%)

+1

• Student loan interest rate < 4% => pay minimum on student loans, max investments.
• Student loan interest rate > 6% => pay down student loans ASAP, ignore investments (except company 401K match, if applicable).
• Student loan interest rate between 4% and 6% => pay down loans if you're a conservative investor, or invest aggressively (e.g. 100% stock asset allocation) if you're comfortable accepting risk.

IMO, the actual amount of debt is not an important factor in the decision unless it's causing problems with cash-flow.

[ReadySetMillionaire]

The interest on that loan must be astronomical. I would concentrate on eliminating that loan. Any benefit that you get from matching and tax deferral probably doesn't approach the loan interest you are paying. I'm guessing you're paying at least $10k a year in interest based on that principal blance.

I have 12 separate loans and they vary from 5.16% to 7.65% interest. My IBR payment is just $76.00 per month (i.e., I am able to stay current on all my loans with this small payment).

Thus, I am actually taking big chunks out of the loans with 7.65% interest. One loan is arround $26,000, and the other is around $8,500. Since they both have the same interest rate I am targeting the lower balance to keep me motivated (goal is to pay that off by the end of the year).

Then with each raise or bonus, I'll move to the next highest interest rate loans and stay as aggressive as possible until I'm done paying them off.

[FranzJoseph]

I would let your employer put away the 3% and put the 11 lower interest rate loans on minimum auto pay.  Then throw everything you have at the highest interest loan and, once it is paid off, work on the next highest interest loan.  Another option is to consolidate all 12 loans into a low interest rate and, depending on the rate, focus on savings/debt pay per Jack's recommendation. 

[WhatIsFrugalAfterAll]

I know this is not what you want, but what lead you to take 150k in debt for a career that paid 46k? Do you have hope of drastically higher pay down the road?

If you can see hitting 200k or something nice in 5 years... I may advocate maxing roth or such now while doing only a medium amount of student loan payments...

[livetogive]

We have reduced my SOs debt from 165k to 40k in 2 years or so,  although we live in a high pay high COL area but it can be done. I highly recommend trying to refi those loans with SoFi if you can.

Also take your employers 3% and don't put in anymore. Just focus on  those loans. Do not consolidate them.

[ReadySetMillionaire]

We have reduced my SOs debt from 165k to 40k in 2 years or so,  although we live in a high pay high COL area but it can be done. I highly recommend trying to refi those loans with SoFi if you can.

Also take your employers 3% and don't put in anymore. Just focus on  those loans. Do not consolidate them.

Thanks for the encouragement. I'm waiting to refinance until I have more job security. Right now, less than a year into the workforce, the protections that IBR/government loans afford outweigh the benefits of a lower interest rate.

[ReadySetMillionaire]

I know this is not what you want, but what lead you to take 150k in debt for a career that paid 46k? Do you have hope of drastically higher pay down the road?

If you can see hitting 200k or something nice in 5 years... I may advocate maxing roth or such now while doing only a medium amount of student loan payments...

Undergrad plus law school. Very high probability of increased income, which has been discussed in some of my other threads/posts.

[Check2400]

Lawyer with student loans here.  At one point I had run some numbers on my loans, and figured out that the majority of the interest paid accrued in the first three years.  Once you get to year four, it is a wash, and after year five, you're paying mostly principal (if you haven't refinanced to a 30 year note).  I attacked all I could for the first two years as I had not consolidated and was able to take off the higher loans.  After three years I was rid of a good amount of the bad loans, and was approaching the "break even point."  I paid off one more, and then saved enough to start paying off the rest.  However, by the time I got there, I noticed that the interest on those payments was nominal (at least relatively speaking) and I had passed the point where paying off the loan amount was better than investing.  So I maxed 401ks and began working it ignore that debt, hard as it may be. 

It is still there, and I hate it, but paying it off to be at zero debt now in the long run no longer makes sense to me.  I instead am approaching life as "Lets save as much as I can for the next six years, when the debt is paid off, and I'll have a large bump in salary and decrease in expenses when it is over." 

The Mint "Goals" feature for paying off student loans was very helpful for me on this--it lets you know how much interest you'd be saving over the course of your repayment. 

This may not be mathematically correct, but it is the thinking I have used.   

[OR]

Just pick off those loans one by one.  Start with high interest one first.  If the interest rate is close, kill the smaller one's first.  It is rush each time you pick one off.  Then you will have more money freed up to get the other loans.  The good old snow ball technique.  Once those loans are toast, you'll make remarkable progress on savings. 

Oh, I'm a fellow lawyer who killed his law school debt this way.  Income boosts do tend to come in our profession and help with the momentum. 

[mak1277]

If you have high earning potential in your future, knock out the loans now.  I didn't contribute to my 401(k) for the first 5 years of my career and at the low salaries of my early years, I only lost out on like $11,000 worth of company match (even factoring in investment growth). 

[ReadySetMillionaire]

Just pick off those loans one by one.  Start with high interest one first.  If the interest rate is close, kill the smaller one's first.  It is rush each time you pick one off.  Then you will have more money freed up to get the other loans.  The good old snow ball technique.  Once those loans are toast, you'll make remarkable progress on savings. 

Oh, I'm a fellow lawyer who killed his law school debt this way.  Income boosts do tend to come in our profession and help with the momentum.

I'm doing this plus paying off high interest rate loans. I got my tax return and a return of my security deposit in April and used all of it $2,300) to pay off my smallest loan ($2,293). The smartest thing would have been to put it on the 7.65% loan, but this one was 6.65% and felt good to pay off.

This seems like it's going to be as much mental as it is mathematical, so I need small victories like this. Looking forward to doing the same if I get a bonus/next year's tax return.

[TrulyStashin]

We have reduced my SOs debt from 165k to 40k in 2 years or so,  although we live in a high pay high COL area but it can be done. I highly recommend trying to refi those loans with SoFi if you can.

Also take your employers 3% and don't put in anymore. Just focus on  those loans. Do not consolidate them.

Thanks for the encouragement. I'm waiting to refinance until I have more job security. Right now, less than a year into the workforce, the protections that IBR/government loans afford outweigh the benefits of a lower interest rate.

I waited too.  I graduated LS in 2011 and the market for new lawyers was horrific.  I refinanced last December with SoFi.  I'm glad I waited but also glad I did it.   In your shoes, I would wait on the 401k contributions and wait to refi.  Focus on crushing one loan -- preferably with the highest interest rate. 

And take comfort in knowing that you're not alone.....   I'm buried too.  We'll get there....

[OR]

Hey, great work on paying off a loan.  That's awesome.  It is really nice when they are separated out.  That way you can kill a payment forever!  A worthy investment of any tax refund, gift, or other lump sum that comes your way.   Once again, congrats!

[YTProphet]

We have reduced my SOs debt from 165k to 40k in 2 years or so,  although we live in a high pay high COL area but it can be done. I highly recommend trying to refi those loans with SoFi if you can.

Also take your employers 3% and don't put in anymore. Just focus on  those loans. Do not consolidate them.

Thanks for the encouragement. I'm waiting to refinance until I have more job security. Right now, less than a year into the workforce, the protections that IBR/government loans afford outweigh the benefits of a lower interest rate.

I was in the same shoes as both of you not too long ago. Had about $165,000 in loans. I paid them off in about 3 years. It can be done fast.

I waited too.  I graduated LS in 2011 and the market for new lawyers was horrific.  I refinanced last December with SoFi.  I'm glad I waited but also glad I did it.   In your shoes, I would wait on the 401k contributions and wait to refi.  Focus on crushing one loan -- preferably with the highest interest rate. 

And take comfort in knowing that you're not alone.....   I'm buried too.  We'll get there....

[ingrownstudentloans]

And take comfort in knowing that you're not alone.....   I'm buried too.  We'll get there....

Fellow Lawstachian, graduated LS in 2011, worked "biglaw" (small market, so small -- comparative -- pay) for 3 years, in-house now.

Went from $120k (avg of 6.5%) in 2011 to $100k in 2 years when I refinanced $70k of it to 1.92%, now at $84,516.32 (all below 4%, majority at 1.92%).  It's a marathon but, as has been stated, "[w]e'll [all] get there . . . ." (Stashin, Truly, Re: $145,000 in Student Loan Debt -- Contribute to 401k?, at post 15 (Apr. 10, 2015)).

[YTProphet]

And take comfort in knowing that you're not alone.....   I'm buried too.  We'll get there....

Fellow Lawstachian, graduated LS in 2011, worked "biglaw" (small market, so small -- comparative -- pay) for 3 years, in-house now.

Went from $120k (avg of 6.5%) in 2011 to $100k in 2 years when I refinanced $70k of it to 1.92%, now at $84,516.32 (all below 4%, majority at 1.92%).  It's a marathon but, as has been stated, "[w]e'll [all] get there . . . ." (Stashin, Truly, Re: $145,000 in Student Loan Debt -- Contribute to 401k?, at post 15 (Apr. 10, 2015)).

If you don't mind me asking, ingrownstudentloans, what kind of work do you do? What size company? I'm looking at in-house in a slightly smaller market than Miami and wondering what I should be looking for in terms of salary.