401k vs Student Loans

[EricMA]

Mustachians,

Over the past year I've been getting on board, slashing expenses, and getting my savings rate way up. I'm not looking for a full case study, but I have a big decision to make, for which I'd love some advice.

I married into over $200k in student loans.  We've paid about $70k down over the last year. They were at an outrageous interest rate (7.9%), but we've recently refinanced. We currently have ~$150k @ 3.3%

We've been in "pay down student loans as fast as possible" mode. Now that the interest rate is so much lower, I'm strongly considering making sure every pre-tax account (401ks, IRAs, HSA) we have is fully funded (we maxed IRAs last year but the 401ks fell short). On paper, it seems like the returns would be higher even without the tax benefits. Throw those in and it's a no-brainer.

Still, I want that debt gone. Is there any logical, sound financial reason to pay the debt off before maxing out all of the tax-free accounts?

We make ~$200k/yr in salary, and ~$50k/yr through side jobs. Expenses are $36k/yr (including mortgage payments, mostly principal at this point). We're in our late 20s and hope to retire before 40. No kids at the moment, waiting a bit longer until we have finances more under control.

Excited to hear what you have to say. Thanks so much!

[ender]

... both?

HSA/401ks/IRA is only ~55k/year off your income. You make $250k.


So you still make $195kish a year after maxing all your accounts and should be able to drop nearly $100k against student loans this year.

[MDM]

And if your 401ks will allow, you could establish a couple of Mega Backdoor Roths and put >$100K/yr into tax-advantaged accounts. 

[Cheddar Stacker]

With that kind of spread between income and expenses you can certainly do both.

Since the tax deduction avalaible for the 401ks ends on 12/31 each year and that window closes, I would max that shit out. Even if you do that now for 2015, and the same in 2016, you should be able to kill the student loans by the end of 2016.

You should check out the journals section and look at the "stealth saving" journal from lentils5eva and ioseftavi. They opted to kill the SL's. Your income and debts are similar to theirs a year or two ago. It could be a nice little inspiration for you.

[EricMA]

Thanks for the great resources;I have a lot of reading to do. I was floored by the Mega Backdoor idea.

I think this pretty much confirms it. I'm going to max out pre-tax savings in every way I can and if it takes an extra year or so to pay off the student loans, so be it.

Thanks again so much for the quick feedback!

[Easy Does It FI]

The 401k in general is probably a better idea because of the expected return from the market is higher than 3-4%. Honestly, since the expected market return is about double your loan rate, you'd be best off paying only the minimum on the loan payments and funding after-tax investing as well.

However, you should try to build a detailed financial plan and plot your major life events through time. When will you retire? What will your income be then? Do you plan to buy a house (and when)? How much will you need saved for a down payment? When do you plan to have kids? Will you both keep working full-time with kids?

The market return is long-term. Once you start ear-marking money to spend inside of ~7 years, the market return is more highly volatile.
Also, how aggressive is your investment personality? What kind of portfolio allocation do you use? As long as you have loans charging guaranteed 3%, the cost of allocating funds to fixed income or cash (E-fund) is higher. The math is easy, just try to think a little a more about the life/psychological side.

As an example, I bought a starter home 6 years ago and only made minimum payments on the cheap debt for 5 years. However, after 5 years, I realized I needed to start saving for a house for a family. I spent year 6 paying off the house (my mortgage was paying better than any cash), and now I have a nice down payment for when we start house-hounting in the coming year. Accelerating the house payments cost me against the assumed market rate, but it was the correct decision for the needed utility of the money.

Good luck on reaching early retirement!

[forummm]

With the 3.3% interest rate, I wouldn't even pay those off early. Max out all tax-advantaged accounts, and then throw everything else into taxable investments.

[Cheddar Stacker]

With the 3.3% interest rate, I wouldn't even pay those off early. Max out all tax-advantaged accounts, and then throw everything else into taxable investments.

Me neither. Mine are 4% and I haven't made any extra payments in 3-4 years. Not for everyone though.