Pay down Student Loans vs Contributing to 401K

[haypug16]

Currently I am putting about $1,400 a month towards paying down my Student Loans. If I have extra at the end of the month I make an additional payment. I'm also contributing $1,000 to my 401K plan per month.

How does this look? Should I put more towards Student Loans?

Here are some more details;
Student Loans
Loan 1 - 5.25% -  $21,770.83
Loan 2 - 5.125% -  $6,444.21
Loan 3 - 4.41% -    $2,328.19
Loan 4 - 4.25% -    $3,064.69
Loan 5 - 3.61% -    $4,878.26
Loan 6 - 3.15% -    $3,516.59
Loan 7 - 3.15% -    $4,916.59
Total                    $46,919.36

My company does a 3% match so I would never go below that but I feel like the tax savings I get from pre-tax contributions out weight the interest rate at least on the lower interest loans. Also with the market being down I feel like I should continue putting in as much as I am, which is not even the max.

Anyway, would love to hear what others think.

[TexasRunner]

You will come out ahead by filling all tax buckets first before paying any of these.

After you hit 19k in 401k and 6k (or 12k) in IRAs, then it might make sense to pay off the 5.125% and the 5.25%.  Also, it might makes sense to start paying these down more aggressively in the 12 to 6 months before fire to reduce mandatory monthly expenditures.  Otherwise, don't touch them.

Also, in a worst case scenario SL debt can be the best because you have several options for changing the repayment plan, often without additional cost.  Its not dangerous debt when your savings rate is 50% and you have 12 months expenses in the bank...

[haypug16]

Thanks for the input. These will definitely be paid off before FIRE (as I'm not planning on reaching that till 2030) but perhaps I will be less aggressive with paying them down. It feels great to make extra payments and see the balances drop but I would like to make decisions less on how it feels and more on if it makes sense financially.

[TexasRunner]

Thanks for the input. These will definitely be paid off before FIRE (as I'm not planning on reaching that till 2030) but perhaps I will be less aggressive with paying them down. It feels great to make extra payments and see the balances drop but I would like to make decisions less on how it feels and more on if it makes sense financially.

I can do the math for you in a spreadsheet that someone on here made if you post the minimum payments for each loan.

It would show payoff time vs extra payments, but math is math and a 5.25% being the highest number you will statistically come out ahead with investing.

[haypug16]

Thanks for the input. These will definitely be paid off before FIRE (as I'm not planning on reaching that till 2030) but perhaps I will be less aggressive with paying them down. It feels great to make extra payments and see the balances drop but I would like to make decisions less on how it feels and more on if it makes sense financially.

I can do the math for you in a spreadsheet that someone on here made if you post the minimum payments for each loan.

It would show payoff time vs extra payments, but math is math and a 5.25% being the highest number you will statistically come out ahead with investing.

That would be awesome! Here's the loans with the minimums. Thanks so much!

Student Loans   -   Total due      Minimum Payment
Loan 1 - 5.25% -  $21,770.83       $649.97
Loan 2 - 5.125% -  $6,444.21        $85.09
Loan 3 - 4.41% -    $2,328.19        $27.98
Loan 4 - 4.25% -    $3,064.69        $36.60
Loan 5 - 3.61% -    $4,878.26        $57.23
Loan 6 - 3.15% -    $3,516.59        $40.18
Loan 7 - 3.15% -    $4,916.59        $55.75
Total                    $46,919.36       $952.80

[frugaliknowit]

Get your match, with the rest cascade (highest interest rate first...) the debt.  This is the best risk/reward (I don't believe it's valid to compare potential stock market returns with loans which are greater than the risk free rate of return because the loan payoff IS risk free.).

[TexasRunner]

So here is your payoff schedule with a $447 Extra Payment, and rolling all minimum payments into the next loan as you pay them off:
Loan 1 - 5.25% Interest - Carried 21 months
Loan 2 - 5.125% Interest - Paying minimums through 20 months - Then paying $1097 extra for 5 months - Carried 25 months
Loan 3 - 4.41% Interest - Paying minimums through 26 months - Then paying $1182 extra for 2 months - Carried 28 months
Loan 4 - 4.25% Interest - Paying minimums through 30 months - Then paying $1210 extra for 2 months - Carried 32 months
Loan 5 - 3.61% Interest - Paying minimums through 35 months - Then paying $1247 extra for 3 months - Carried 38 months
Loan 6 - 3.15% Interest - Paying minimums through 38 months - Then paying $1304 extra for 2 months - Carried 40 months
Loan 7 - 3.15% Interest - Paying minimums through 40 months - Then paying $1344 extra for 3 months - Carried 43 months

Total interest paid during accelerated payoff (roughly, didn't include reductions):  $4,757.02

If you DID NOT pay any extra, you would have the following loan spans:

Loan 1 - 5.25% Interest - Paying minimums through 37 months
Loan 2 - 5.125% Interest - Paying minimums through 93 months
Loan 3 - 4.41% Interest - Paying minimums through 101 months
Loan 4 - 4.25% Interest - Paying minimums through 101 months
Loan 5 - 3.61% Interest - Paying minimums through 100 months
Loan 6 - 3.15% Interest - Paying minimums through 101 months
Loan 7 - 3.15% Interest - Paying minimums through 102 months

Which lets us know that we are looking at comparisons for a 102 month (8.5 Year) timeline.

Best Case 9-Year CFireism Run = +415.80%  (46.2% APY)
Worst Case 9-Year CFireism Run = -43.40%  (-4.82% APY)

AVERAGE Case 9-Year CFireism Run = 99.1%  (11.01% APY)

So, worst case for stocks you win by paying early in the amount of $2,404.00 gained.
Best case for stocks you lose by paying early in the amount of ($331,960.00).

Average case for stocks you lose by paying early in the amount of ($13,046.00).

Considering it isn't a huge deal if you were to "lose" 13 grand on average across your whole financial life, this wouldn't be a big deal.  The real problem is not maximizing the tax-free accounts.  That isn't space that you can get back and considering there is a much bigger downside to not investing compared to a relatively small upside by paying off early, I would say max tax accounts first then with any extra dollars pay off the 5% or more loans early.

[TexasRunner]

I don't believe it's valid to compare potential stock market returns with loans which are greater than the risk free rate of return because the loan payoff IS risk free.

Which is why it IS valid to look at the best and the worst returns for stocks across the time span in question and see how it changes the numbers.

On a typical mortgage, stocks have never lost to a 7.5% mortgage (or lower) on a 30-year timeline.  Hence- minimal risk from stocks.

[haypug16]

Thanks so much TexasRunner for the sheet and the breakdown very helpful, and thanks frugaliknowit for your input. I'm going to do some more thinking and may just slowly increase my 401k and see how it changes things. I can always change it back easily enough.

[RWD]

The investment order post recommends investing in tax-sheltered accounts before paying off debt below 7.67% interest (based on current 10 year treasury note yield).

[haypug16]

Thanks for the link RWD. I think I saw that a while back but forgot all about it.

[TexasRunner]

Thanks so much TexasRunner for the sheet and the breakdown very helpful, and thanks frugaliknowit for your input. I'm going to do some more thinking and may just slowly increase my 401k and see how it changes things. I can always change it back easily enough.

Happy to help @haypug16!  While emotions are important, IMO we need to regulate our emotions through understanding real risk (preferably mathematically).
Unrealistic perceived risk is dangerous in and of itself.

Let us know what happens!

[thesis]

Good posts on here.

What is nice about paying student loans off is that you have a guaranteed ROI in the form of the interest rate. At the same time, it sucks to miss out on buying into the market. I'm usually one of the heathens advocating for paying off the smallest loans first, but in your case the numbers are so close on most of your loans, that hardly matters. Definitely focus on highest interest rate.

My very non-mathematical advice would be to put enough in your 401k to max it out by the end of the year, then use the rest of the money to pay extra on the loans. You're in a good position if you can cash out the 401k, penalty and all, and pay the loans off in an extreme emergency, though of course hopefully it would never come to that. But that's why having money in the market is so nice: you still have control over it. Money paid on loans disappears and can't help you in the event of an emergency. In others words, do pay your debts off, just realize that hitting that 401k limit is mighty powerful and allows you to "de-couple" your finances from your debt situation.

Just one perspective :)

[haypug16]

Thanks everyone for the comments. I have decided to take most of the extra I was putting towards Student Loans and contributing it to 401K. I probably wont hit the max $19K contribution this year since I will be out on Maternity leave for 3 months and not getting a paycheck (I'll get paid through Short Term Disability) so I think it makes even more sense to increase my 401K contribution before and after leave. I should also be getting a nice bonus right before I go on leave which I am going to save and then when I get back from leave I may be able to use that money for the loans and also jack up my 401k contribution before the end of the year. We'll see how it goes.

p.s. I also mentioned this to Mr. Pug and he basically said "duh of course you want to max out your 401K first!" lol so it's good to know he and I are on the same page.