Take out student loans or stop retirement contributions?

[Millennialworkerbee]

We are looking at DH going back to school for his bachelors degree. He would go full time (he basically has no college credits so would need 3-4 years to complete)  and the cost of tuition would be around 15k. He will not work during this time, because we have 2 small children and he will also be watching them during the week a good amount (which will save on daycare costs).

Option 1: Stop my retirement contributions and cash flow the whole thing off my paycheck. At the end of the 4 years, come out around 15k ahead of where we stand today, with no additional debt.

Option 2: Continue retirement contributions. Would need to take out about 5k in loans over the 4 years.

There is roughly 20k up for grabs here (obviously a little more if it went to 401k pre-tax, less post tax). If I continue the retirement contributions, every penny of this 20k would be matched 100% by my employer- so real opportunity cost is 40k.

We are 27/32 now and would be 31/36 when school is complete. We have around 80k in retirement today. My company does a core contribution to my 401k regardless of my participation as well- this would be around 15k over the 4 years. Our goal is to retire when our kids leave for college- 20 to 25 years from now around age 55.

Which option would you think about in our situation? I think we’d go with the federal subsidized ones- current interest rate is around 4.5%.

Thanks!

[Proud Foot]

How much do you currently contribute to retirement vs the company match? I would continue to contribute at least enough pre-tax to get the full match.

5k in loans is a pretty small amount. Get the subsidized ones as you will not be charged any interest until after he starts repayment. The amount is small enough that once he graduates and gets a job you can decide whether to pay it off in full right away or pay it off as scheduled.   

[Lady SA]

I would keep contributing to retirement. $5k in loans is nothing. Even if that was a typo and its more like $15k in loans, I would contribute as much as I can get a match for (and when you say every penny is matched, you better believe I would contribute everything I could to retirement!).

Its a difference between 3-7% interest on your debt and 100% on matched savings and ~25% on pre-tax savings. Mathematically, I would take the loans. Student loans are kind of scary because they can't be discharged, but if you have a solid plan in place, they are relatively low interest (now, at least!), low amount, and lower risk. I think the tradeoff between debt risk and maximizing savings is worth it.

For context, my DH and I are prioritizing investing heavily over paying off our student loans.

[frugaliknowit]

I would opt for plan C:  Continue retirement savings, cashflow tuition, and DH picks up odd jobs to make up the 5k difference.  He could easily do the latter by doing before or afterschool care for one or two other kids similar in ages to yours.  Or you guys could set up a regular "date night" baby sitting gig with one or two couples you know.

+1, but with caveats: 

Why is DH going full time (presumably quitting his job)?  How much is he currently making...I tend to think he shouldn't.  It adds too much risk to your equations.

What is he pursuing a degree in?  What is the position and likely salary to start and projected salary 10 years in?  Is the return worth it?  Can this be achieved using part/all community college/state universities for less?  Tread very carefully:)

[Wayward]

I would not stop contributing to the 401k, make sure you get the entire employer match.  The Federal subsidized loans don't start collecting interest until 6 months after graduation, so that gives you plenty of time to save up while he's in school and pay it off as quickly as possible!

[Millennialworkerbee]

Thanks for the responses. DH makes about 45k now at a company that imports goods and resells. He is looking into supply chain management for a degree which is related to his experience. He has looked for jobs for several months but not having any advanced education is a barrier to entry. With 20 more years working, we do feel that the ROI is worth it (he could get probably 65k+ starting out with six figure potential long term). He got into his current job because of family connections, and the company is in decline and not likely to be around in 5-10 years.

We’ve chosen FT school for two main reasons: he could be at home while our little ones are little (this is more of an emotional decision, but it would save us on childcare) and the 120 credits needed for a bachelors degree would take a very long time to acquire part time and we both worry about burnout of working & going to school for 7-8 years.

I do think that he would likely be able to find PT work to make 5k in 4 years, but want to be careful about not overloading him with FT school plus daily child care several hours a day for our small children.

I get a dollar for dollar match up to 6% (this is the ~20k over 4 years mentioned) plus an additional 4% core contribution regardless of my participation (15k mentioned). Can you tell I work for a company that sells 401k plans? ;) Right now I participate at that 6% to get all the match.

I forgot about the subsidized loans not accruing interest while in school, that makes it a no brainer. Thanks!!

[frugaliknowit]

We’ve chosen FT school for two main reasons: he could be at home while our little ones are little (this is more of an emotional decision, but it would save us on childcare)

I hear you, but what if you lose your job while he's in school and you or both of you have trouble finding work and are stuck with those loans...?  Too much has to go right with your plan, in my opinion...

[Lathome]

Just to chime in to say we recently made a similar decision where DH is full-time in school (which is 2 days/week) and home w little ones 3 days. Financially we had enough cushion to make it work without him taking on additional paid work. He’s excellent w time management but I don’t feel an additional PT job would be worth it in terms of either taking time away from studies or the family, but that’s just us. It’s been a great move on many fronts and I hope it is for your family too!

[MDM]

Its a difference between 3-7% interest on your debt and ... ~25% on pre-tax savings.

Tax-advantaged investing is good, and from what is in the OP it seems "maintain retirement saving contributions" is reasonable, but ~5% interest and ~25% are not appropriate numbers for comparison.

That's because the 25% is not earned, it's deferred.  At some point the 25% (or, depending on one's future tax rate, a lower or higher percentage) must be paid.

One should compare the after-tax interest rate on the debt to the return one can get in the 401k/IRA/etc.

[Raenia]

Its a difference between 3-7% interest on your debt and ... ~25% on pre-tax savings.

Tax-advantaged investing is good, and from what is in the OP it seems "maintain retirement saving contributions" is reasonable, but ~5% interest and ~25% are not appropriate numbers for comparison.

That's because the 25% is not earned, it's deferred.  At some point the 25% (or, depending on one's future tax rate, a lower or higher percentage) must be paid.

One should compare the after-tax interest rate on the debt to the return one can get in the 401k/IRA/etc.

Don't forget about the instant 100% return from the employer match - OP stated that:

If I continue the retirement contributions, every penny of this 20k would be matched 100% by my employer- so real opportunity cost is 40k.

Given that, I think the clear choice is to continue 401k contributions up to the employer match, and take the loan.  The interest on the loan will certainly be less than the employer match left on the table, even assuming no tax savings or gains.

[MDM]

I think the clear choice is to continue 401k contributions up to the employer match....

Yes to that part.

See Investment Order for more.