Author Topic: student loan vs 401k?  (Read 2651 times)


beantown

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Re: student loan vs 401k?
« Reply #1 on: February 11, 2016, 07:04:11 PM »
Nope those arguments do not make any sense. #2 is basically, you'll be more motivated so thus you'll save more. No, you'll save more if the financials make sense and you stick with it. As an example, I currently have about $16k left in student loans that are about 7% interest. My marginal tax rate (the top tax rate that I'm paying) is around 35-36%. Thus by maxing my 401k, I'm effectively saving $6.3K this year. If I were to take that $18K and let it get taxed at the 35% and then throw it at my student loans, I'd be saving only about $800 this year (65% of $18K multipled by 7%). And I haven't even started getting into how much the 401k could appreciate based on past data.

JLee

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Re: student loan vs 401k?
« Reply #2 on: February 11, 2016, 10:55:55 PM »
Nope those arguments do not make any sense. #2 is basically, you'll be more motivated so thus you'll save more. No, you'll save more if the financials make sense and you stick with it. As an example, I currently have about $16k left in student loans that are about 7% interest. My marginal tax rate (the top tax rate that I'm paying) is around 35-36%. Thus by maxing my 401k, I'm effectively saving $6.3K this year. If I were to take that $18K and let it get taxed at the 35% and then throw it at my student loans, I'd be saving only about $800 this year (65% of $18K multipled by 7%). And I haven't even started getting into how much the 401k could appreciate based on past data.

Plus, if you're in the 35% tax bracket ($413,350+/year) you should be able to pay that $16k off awfully fast anyway!

beantown

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Re: student loan vs 401k?
« Reply #3 on: February 12, 2016, 06:35:17 AM »
The 35% is combined state, local, and federal. I wish I was in the 35% federal tax bracket!

NoStacheOhio

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Re: student loan vs 401k?
« Reply #4 on: February 12, 2016, 07:18:19 AM »
I think it also depends heavily on the amount of debt you have. If it's a small amount that you plan to knock out quickly, then delaying retirement contributions is probably fine. If it's going to take 10 years to pay off the loan, then delaying contributions is less appealing.

shotgunwilly

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Re: student loan vs 401k?
« Reply #5 on: February 12, 2016, 08:42:31 AM »
No. Dumb article.

ReadySetMillionaire

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Re: student loan vs 401k?
« Reply #6 on: February 12, 2016, 08:57:19 AM »
https://studentloanhero.com/featured/pay-off-student-loans-or-invest-retirement/?utm_source=studentloanhero&utm_medium=email&utm_campaign=20160211weeklydigest&mc_cid=a3a1a78aa4&mc_eid=6080e8f554#


make sense to anyone?

it doesnt really to me

This article is so remarkably stupid that it would take my entire morning at work to respond to every dumb statement.

Pretend you never read this article and invest in your retirement. Also try to make a side income. You'll thank yourself in 10-15-20 years.
« Last Edit: February 12, 2016, 09:11:11 AM by ReadySetMillionaire »

nereo

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Re: student loan vs 401k?
« Reply #7 on: February 12, 2016, 09:00:36 AM »
I think both of their arguments are inherently flawed
1) you'll be able to make bigger monthly payments.  In a vacuum this is true, but it comes at the expense of saving more money.  If there is any 401(k) match at all this works out to a no-win proposition even if the market drops considerably. 

2) you'll be extra motivated to pay off your student loan debt.  The reasoning here is pretty flawed too.  Behavioral economics has shown that we miss money less if it never enters our bank account, which is why 401(k) payments can be so great - that money typically gets deducted from the paycheck.  Student loans, OTOH, are paid out seperately, which means a person sees that money enter the account, and then quickly leave the account.  Also, "motivation" is a pretty strange justification.  You're pretty much required to make monthly payments, just as you are with your cable or electric bill. Unlike credit card bills, the standard SL bill has a set payback period (usually 10 years)  Sure, you could default, but a person who's defaulting on their loan isn't likely to be someone who's also putting away thousands into a 401(k).

As NoStacheOhio indicated, the only time it might make sense (or be "less bad") is when you can pay off the entire loans in a very short time period - like within a year or two and if there's no company match.