Pay off student loans, or invest in 401k ?

[hobbit.trap]

First, my question is simply whether I should, in terms of long-term monetary gain, pay down my student loans neglecting my 401k, or prioritize investment in my 401k?

Now, my new job coming out of college and other financial information that I can think of

• Salary: 96,000 plus discretionary bonuses
• RSUs: 2000 stocks (125 per quarter over 4 years), currently valued at about $10/share
• Alimony: I expect to pay 35% alimony to my ex-wife, so ~33,000
• Child Support: We have no kids!
• 401k: The company will match half of my investment to a maximum of 3% of my income (so they will pay 3% if I pay 6%, and if I pay more than 6% they will still pay 3%).
• Loans: About $40k in loans, with an interest rate of I believe 6.8%

It seems to me that there are two obvious options which present themselves.  The first option is to ignore the 401k for now and pay down student loans.  The second option is to invest 6% of my salary into the 401k, and pay the rest into student loans.

The naive and probably incorrect calculations say that I'm getting 50% extra income on the 401k, which outweighs the tax credits and 6.8% interest on loans, so I should invest the 6% into the 401k firstly and secondly pay off loans with what's left over.

But these are back-of-the-napkin style calculations and are naive in nature.  What should I actually do?

[ScubaAZ]

I just asked this very same question, and got some good responses here:  https://forum.mrmoneymustache.com/ask-a-mustachian/401k-vs-student-loans/msg85691/#msg85691.

FWIW, I'm continuing to max my 401k, and then throw as much extra as I can to my student loans.

[Chowder]

If your salary is 96,000 you're not going to see any tax credit from the interest on the student loans. You'll also probably pay more than the limit of $2500 anyway, so it's best not to think about that deduction working in your favor.

I'm in a similar position and following Scuba's lead with max to 401k then extra towards my debt.

[ScubaAZ]

Definitely contribute at least enough to get your employer's match.  50% return is worth paying 7% interest on the student loans. 

Run the numbers on deducting your student loan interest-- alimony is generally deductible (I'm not a tax lawyer, so double check this, and the exceptions!), so that may bring your income down to where you could deduct at least part of the interest.

[little_owl]

I would recommend maxing out your 401k, and then prioritizing the student loans after that.  The 401k is an ionvestment in your future, and the time value of money is such that you want more in there so it can work for you.

Is there a timeline on that alilmony?  If it runs out in a few years, you could obviously use that to easily pay off the student loan.

[Khan]

I would pay the maximum on the 401k for the employer match, and then go all in on wiping out the student loans. Investing is not a guaranteed, whereas a 6.8% guaranteed return is nothing to snub your nose at. I'd kill the loans first.

[bokonon]

Hmm I wonder how much difference it would make in tax savings (which is guaranteed - similar to paying off the student loans) maxing out the 401k vs only contributing enough to max employer match.

I looked around the web briefly and couldn't find a good calculator.  It has to at least be possible that maxing the 401k to reduce taxes will save more than the change in student loan interest would be.  Of course you have to pay tax on the 401k money eventually, it's only deferred and how much depends upon your retirement income.  I guess it's a complex question.

The above notwithstanding, I currently put enough into my 401K to maximize the employer match, then all surplus goes toward student loans for the guaranteed 6.8%.  This seems to be the common sense / most prevalent answer on these boards and works well for me.

[Mazzinator]

Hey all, i'm in a similar boat. $76k taxable salary (dh is in the army so he also gets untaxed pay) i think it's ~$100k salary with $100k SL debt.

I also tried to comment on ScubaAZ post, as you can read, and my ghetto math was picked apart, haha.. Anyways, i used the withholdings calculator, the only one i could find which gave me an accurate amount of taxes owed with and without TSP (401k)

http://apps.irs.gov/app/withholdingcalculator/

Fwiw, we, well my dh, i sah, he is maxing out TSP and maybe Roth (we haven't decided yet) and we are throwing the rest at the SL. We are also getting ready to PCS (move) so we are going to follow MMM and downsize, live close to work, sell a car, etc.. So hopefully we can knock these out!!!

Eitherway.. Good luck!!!

[fupaflap]

I hate to be sound like I'm getting into your personal business, but I am in AWE of how much your making just out of college. I'm 25 just graduated last year with a BA in computer science, I know I Don't live in a large city like Chicago so I understand that the pay scale is going to be less, I even have friends with higher paying degrees ( Engineering etc) than me who cant find work at all and if they have I am making more money then them. I'm really just posting hoping for assurance that it will get better Haha I mean I'm busting my hump to get a better job than the one I have now and Im only getting paid 40k a year. What am I doing wrong?

[rocksinmyhead]

I hate to be sound like I'm getting into your personal business, but I am in AWE of how much your making just out of college. I'm 25 just graduated last year with a BA in computer science, I know I Don't live in a large city like Chicago so I understand that the pay scale is going to be less, I even have friends with higher paying degrees ( Engineering etc) than me who cant find work at all and if they have I am making more money then them. I'm really just posting hoping for assurance that it will get better Haha I mean I'm busting my hump to get a better job than the one I have now and Im only getting paid 40k a year. What am I doing wrong?

a lot just depends on industry. I don't know what OP's in, but I work in oil and gas and starting salaries/benefits for engineers and geologists are similar to what he posted. there's the tradeoff of additional risk in a boom-and-bust industry like that, though.