Forbes Advice on Student Loans v. Retirment Savings for the Intern generation

[prof61820]

Forbes is counseling the intern generation on how to get ahead.  It lists 7 Retirement Myths and # 3 is "I need to pay my student loans off first."  This is the explanation.

This is understandable. After all, no one likes having to make debt payments every month. However, student loan rates tend to be relatively low, and for many taxpayers the first $2,500 of interest paid is tax deductible. If your loan rates are less than 5-7% after taxes, you could probably earn more by investing in your 401(k) than you would save in interest by paying down those student loans early. On the other hand, if you have credit cards or other high-interest debt above 5-7%, it does make sense to pay them off first. (Between 5-7%, it depends on your personal comfort with investing and debt.)

Is this realistic?  Is this a good good strategy?

Here is the link to the story: http://www.forbes.com/sites/financialfinesse/2013/10/03/7-retirement-myths-that-could-produce-a-lost-generation/

[grantmeaname]

Yes, the advice seems reasonably accurate. That doesn't necessarily mean it's a good idea for you or your life, though - that's more of a personal call about risk aversion. If you'd absolutely hate yourself if you contributed to your 401k and then had a -30% year, which happens from time to time, it would probably be wise to pay down even a 3.4% subsidized loan - you're locking in 3.4%, so to speak. There's also the psychological benefit of being out of debt, which is not insignificant for many people.

[StarryC]

A couple other factors I think weigh in favor of usually saving before paying down the student loans:

If you have a relatively high paying job as a single person who is young (22-32, $50,000+) and you don't own a house, your tax rate is probably pretty high.  You don't have little deductions, a lower paid spouse, or a mortgage deduction.  So, if your top rate is 20%, your 401K savings are going to "automatically" grow by that much even with no other returns. 

You can't get years of 401K building back, each year has a limit.

If your loans are federal, they are flexible.  So, if later your income dramatically drops, you might be able to have the payment reduced/deferred/ forbeared and you will still have the loans gone in 25 years.  This isn't true of the 401K- if you don't save, they won't automatically put a bunch of money in after 25 years, and you will just have to stop saving if you can't make ends me.  Therefore, if you have the ability to put the money in now, take advantage of it. 

401K funds are accessible to you later, while payments you make on your student loan aren't.  You shouldn't plan on them as your emergency fund, etc.  But, in a really true emergency in which the choice is pay a penalty, lose the 401k and avoid a foreclosure/ bankruptcy/ abandoning a child/ avoiding a medical treatment, I think the 401K funds are fair game. 

[cats]

I think this is pretty sound advice, IF you have a low interest rate and IF it's locked in.  There's something to be said for getting in the habit of saving early, and personally I think once you have the 401k or IRA set up, you've crossed one of the bigger hurdles--getting started.  Also, 401k/IRA accounts typically have some sort of tax advantage, while I believe the only part of student loan debt that can help your tax situation is the interest paid (someone correct me if I'm wrong??).  For example, when I ran a quick calculation on what my net pay would be with and without maxing out my 401k, the difference in tax burden was on the order of $8k/yr.  So if I had a low-interest student loan, and $17,500 available to put towards either savings or loan repayment (before any tax benefits from 401k contributions went into effect), I would put it towards a 401k, then use the $8k of suddenly freed up tax money for my loan. Or something to that effect (I never actually concurrently had a student loan and the option to contribute to a 401k, so....).

[FinancialIndependenceTime]

A couple other factors I think weigh in favor of usually saving before paying down the student loans:

If you have a relatively high paying job as a single person who is young (22-32, $50,000+) and you don't own a house, your tax rate is probably pretty high.  You don't have little deductions, a lower paid spouse, or a mortgage deduction.  So, if your top rate is 20%, your 401K savings are going to "automatically" grow by that much even with no other returns. 

You can't get years of 401K building back, each year has a limit.

If your loans are federal, they are flexible.  So, if later your income dramatically drops, you might be able to have the payment reduced/deferred/ forbeared and you will still have the loans gone in 25 years.  This isn't true of the 401K- if you don't save, they won't automatically put a bunch of money in after 25 years, and you will just have to stop saving if you can't make ends me.  Therefore, if you have the ability to put the money in now, take advantage of it. 

401K funds are accessible to you later, while payments you make on your student loan aren't.  You shouldn't plan on them as your emergency fund, etc.  But, in a really true emergency in which the choice is pay a penalty, lose the 401k and avoid a foreclosure/ bankruptcy/ abandoning a child/ avoiding a medical treatment, I think the 401K funds are fair game. 

One more thing to consider...currently(the laws could change in the future) if you are sued, have a judgement against you or file bankruptcy your retirement accounts are NOT included as your total assets.