Author Topic: Student Loan Repayment Options vs. Retirement Contributions  (Read 1429 times)

jakerm17

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Student Loan Repayment Options vs. Retirement Contributions
« on: September 09, 2016, 02:35:27 PM »
I'm new to forums and this is my first post here - MMM & the other FI blogs are exactly the resources I've been looking for. I'll get right to it.

I'm 31, single, with currently $65,500.00 in student loans. I have been out of grad school working for a little over a year. I make 90k salary and will soon start a second job bringing in an additional ~$1500/mo.

Question: Where should I be putting my money? 100% to the debt or some combination to retirement as well?

My employer does not offer a 401k so I have an IRA and Roth IRA. Last year, I maxed those out and then put everything else towards the loans (~25k). The loans are spread into 3 groups:

A: $10,375 @ 6.55%
B: $21,690 @ 5.16%
C: $33,437 @ 6.16%

My month loan payment is $350. I've been paying that and an additional $1000-1200/mo.
On my current path, I'm looking at 2 1/2-3 years until I get this knocked out. Does anyone see a more efficient way to do this?

I was thinking of going into forebearance and that would allow me to forgo the monthly payment and put that money towards a specific group (A,B,C). That would free up an additional $4200/year ($350 x 12 mo.)


Any thoughts or other strategies?

Thanks!.!.!


 

Jack

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Re: Student Loan Repayment Options vs. Retirement Contributions
« Reply #1 on: September 09, 2016, 02:48:29 PM »
Max your traditional IRA (FYI, you can't max both a Roth and a traditional; you get $5500 total to split between the two). Then pay the loans down in the order of A first, then C, then B.

...Unless you can refinance to reduce the interest rate below, say, 4% or so. If you do that, stop paying extra on them and invest the money instead.

Personally, I wouldn't use up the forbearance (you can only get it for a limited amount of time) just to be able to pay extra on A instead of B; I'd keep that option open in case of unemployment or something.

Also, negotiate with your employer to get some kind of employer retirement plan (401k, SIMPLE IRA, etc). Taxes on $90K will suck without being able to defer more of it. Even negotiating to become an independent contractor (with an appropriate raise to compensate for payroll tax and loss of benefits) might be worth it, to become eligible for a solo 401k.

mskyle

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Re: Student Loan Repayment Options vs. Retirement Contributions
« Reply #2 on: September 09, 2016, 02:51:58 PM »
I don't think the differences in interest rates are big enough to make applying for forbearance worthwhile. At the rate you're going, the difference in when you pay off the group A loans if you're paying $1850 a month vs. paying $1100 a month is about four months. So applying for forbearance would save you ~ .5% interest for four months, which might work out to a few hundred dollars? I guess over the three years you expect it will take you to pay them off it might save you a thousand or so, if you could get forbearance for the entire time.

But I think you should just do what you're doing (assuming you also have a suitable emergency fund and you're saving for near-term financial needs like a real estate down payment or car if you've got anything like that in your near-term plan). I don't know how likely you are to be approved for forbearance if you're making $100K+ and have payments of $350 a month.

One could even make an argument for paying the loans off more slowly and using the extra money to invest in a taxable account, but you seem excited about paying off debt and those interest rates, while not terrible, aren't so small that you would want to ignore them.

jakerm17

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Re: Student Loan Repayment Options vs. Retirement Contributions
« Reply #3 on: September 09, 2016, 03:06:15 PM »
Max your traditional IRA (FYI, you can't max both a Roth and a traditional; you get $5500 total to split between the two). Then pay the loans down in the order of A first, then C, then B.

...Unless you can refinance to reduce the interest rate below, say, 4% or so. If you do that, stop paying extra on them and invest the money instead.

Personally, I wouldn't use up the forbearance (you can only get it for a limited amount of time) just to be able to pay extra on A instead of B; I'd keep that option open in case of unemployment or something.

Also, negotiate with your employer to get some kind of employer retirement plan (401k, SIMPLE IRA, etc). Taxes on $90K will suck without being able to defer more of it. Even negotiating to become an independent contractor (with an appropriate raise to compensate for payroll tax and loss of benefits) might be worth it, to become eligible for a solo 401k.


Yes, taxes on the 90k do suck. I have been considering taking a different job but it would up my commute from 15 min. to 90 min. each way. It would give me a 401k and 20% salary bump though. I haven't looked into refinancing as a serious option but maybe I'll do so now. A lot of people in my position used to be independent contractors but now they've made everyone employees (happened before I started). On the flip side, maybe I could campaign to have them start a 401k?

robartsd

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Re: Student Loan Repayment Options vs. Retirement Contributions
« Reply #4 on: September 09, 2016, 03:16:50 PM »
Yes, taxes on the 90k do suck. I have been considering taking a different job but it would up my commute from 15 min. to 90 min. each way.
I think 90 minute each way commutes suck more than taxes on 90k income.
On the flip side, maybe I could campaign to have them start a 401k?
I'd be doing this (or relocating to a more reasonable commute distance for the other job).