Author Topic: Student loan or 401k loan?  (Read 6124 times)

mustachian.acolyte

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Student loan or 401k loan?
« on: July 21, 2012, 09:11:43 AM »
Greetings fellow Mustachians. I need to make a decision about my debt payoff and I wanted to get additional perspectives before I do.

Long story short, I've got student loans ($19k @ 6% interest) and a 401k loan ($3200 @ 4.25% interest). I came into some money so I've got $5100 sitting around -- enough to vanquish the 401k loan once and for all. But, I could save on interest (etc etc) by paying my student loan.

I blogged some more details here:
http://towardmmm.blogspot.com/2012/07/decision-student-loan-or-401k-loan.html

So far the consensus over there is do the debt snowball thing and pay off the 401k loan. But maybe others have another perspective!

Thanks in advance, all.

arebelspy

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Re: Student loan or 401k loan?
« Reply #1 on: July 21, 2012, 01:21:31 PM »
Disclaimer: did not read link with more details.

IMO, debt snowball is for financial wussies, not Mustachians.

That said, paying the 401k loan gives the advantage that you can now contribute to your 401k again.  If you get any sort of match, this will be advantageous.  If that's the case, do that.

Either way, your debt is an emergency, so do both ASAP.  ;)
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mustachian.acolyte

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Re: Student loan or 401k loan?
« Reply #2 on: July 21, 2012, 02:55:26 PM »
IMO, debt snowball is for financial wussies, not Mustachians.

That said, paying the 401k loan gives the advantage that you can now contribute to your 401k again.  If you get any sort of match, this will be advantageous.  If that's the case, do that.

Strong words! Thanks for your thoughts.

Fortunately I can contribute to my 401k (and get company matching contributions) even with the 401k loan. Otherwise my decision would be a no-brainer :)

JR

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Re: Student loan or 401k loan?
« Reply #3 on: July 21, 2012, 06:55:18 PM »
I would pay back the 401k loan immediately if I were you.  If you lose your job you will have x amount of days (60?) to pay it back and if you can't you will have to pay the 10% penalty and taxes on the outstanding balance.

Another Reader

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Re: Student loan or 401k loan?
« Reply #4 on: July 21, 2012, 07:26:02 PM »
I don't agree about the debt snowball.  Reducing the number of payments and the total amount that you must pay monthly not to default gives you flexibility if your circumstances change or an emergency comes up.  Yes, it makes more sense mathematically to apply payments to the $100,000 mortgage at 6 percent over the $3,000 car loan balance at 2.9 percent.  But once you lose the car payment, you can cash flow small emergencies.

The debt snowball works really well for people that are maxed out and really stressed.  A combination of serious expense cutting and paying off small debts frees up cash flow for saving for emergencies.  Once there is a cash reserve, they can confidently begin the all out attack on the bigger debt.

Another Reader

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Re: Student loan or 401k loan?
« Reply #5 on: July 21, 2012, 07:31:14 PM »
Forgot to finish the thought.

In your shoes, I would pay off the 401k loan yesterday.  If I did not have savings, I would put most or all of the remaining $1,900 in a high yield savings account linked to my checking account.  Then I would go all out on paying the student loans, because your debt IS an emergency.

grantmeaname

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Re: Student loan or 401k loan?
« Reply #6 on: July 23, 2012, 08:26:10 AM »
I don't agree about the debt snowball.  Reducing the number of payments and the total amount that you must pay monthly not to default gives you flexibility if your circumstances change or an emergency comes up.  Yes, it makes more sense mathematically to apply payments to the $100,000 mortgage at 6 percent over the $3,000 car loan balance at 2.9 percent.  But once you lose the car payment, you can cash flow small emergencies.

The debt snowball works really well for people that are maxed out and really stressed.  A combination of serious expense cutting and paying off small debts frees up cash flow for saving for emergencies.  Once there is a cash reserve, they can confidently begin the all out attack on the bigger debt.
That's a good general commentary on why Ramsey and his ilk recommend the snowball, but doesn't even vaguely describe the OP. As he notes in the link, the 401k loan payment is only $78/month; elsewhere on his blog, he notes that he has $1300 in discretionary income alone each month. Given that, it seems like really small beans. And given that his is a two-income household with combined expenses, I think it matters even less.

Fuzz

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Re: Student loan or 401k loan?
« Reply #7 on: July 23, 2012, 07:01:40 PM »
I agree that a$78 payment a month is small beans for a two income household with $1300 disposable income. But does the small beans argument cut the other way? It would be so easy for him to get rid of the loan, why not do that first and then concentrate on the bigger loan. Mathematically, yes, it's better to go after the high interest rate loan first, but there is something to be said for dispatching with one payment. Besides, at $78 a month that 401K loan will be small beans for years.

Perhaps I'm just engaging in a bit of post hoc rationalization. I had one 3K loan at 5% that I paid off. Now I'm tackling a 15K student loan at 7.5%, which I figure will take about a year to 15 months. Anyway, I did the small loan first. The important thing is just to pick one loan and DO IT! As long as you get there, the fact that another route is a few steps shorter doesn't matter.

You're in good shape and best of luck.

menorman

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Re: Student loan or 401k loan?
« Reply #8 on: July 24, 2012, 11:02:37 PM »
I don't agree about the debt snowball.  Reducing the number of payments and the total amount that you must pay monthly not to default gives you flexibility if your circumstances change or an emergency comes up.  Yes, it makes more sense mathematically to apply payments to the $100,000 mortgage at 6 percent over the $3,000 car loan balance at 2.9 percent.  But once you lose the car payment, you can cash flow small emergencies.

The debt snowball works really well for people that are maxed out and really stressed.  A combination of serious expense cutting and paying off small debts frees up cash flow for saving for emergencies.  Once there is a cash reserve, they can confidently begin the all out attack on the bigger debt.
That's a good general commentary on why Ramsey and his ilk recommend the snowball, but doesn't even vaguely describe the OP. As he notes in the link, the 401k loan payment is only $78/month; elsewhere on his blog, he notes that he has $1300 in discretionary income alone each month. Given that, it seems like really small beans. And given that his is a two-income household with combined expenses, I think it matters even less.
With that in mind, I'd say throw the money at the student loan. Bringing the balance to down near $14k, he could use the discretionary income to completely vanquish it within a year...

mustachian.acolyte

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Re: Student loan or 401k loan?
« Reply #9 on: July 25, 2012, 07:01:44 PM »
Thanks, everyone, for the advice. I think I'm all but decided on killing the 401k loan.

JR's advice put me over the edge:
I would pay back the 401k loan immediately if I were you.  If you lose your job you will have x amount of days (60?) to pay it back and if you can't you will have to pay the 10% penalty and taxes on the outstanding balance.

I could save a few bucks paying down the higher interest rate first, but eliminating the 401k loan is essentially an investment in peace of mind. I'm being risky enough with my 0% credit card, practically nonexistent emergency fund, etc etc. Retiring some risk will be good for me.