Student Loans vs retirement savings

[mustache you a question]

Hi All,

First time posting on this site and I have a couple of questions I need some help on.  My fiance and I are in our late 20s and carry about 54k in student loan debt.  We will have her's paid off by the end of November and by the end of the year we figure the debt will be around 48k.  Combined we make around 105-110k and by my estimates we should be able to get this all clear by the end of 2016, but it will be tight.  Currently we both put 10% into our 401ks, my company matches at 1.5% and hers does not.  I have a little over 10k in my 401 while she has around 6 at the moment.  Should we stop adding to our 401 and use that money to pay the debt off faster?  We don't have any additional debt (we rent an apartment).  Any advice is appreciated.

thanks.

[KCM5]

What is the rate on your student loans?

[mustache you a question]

6 percent.  About 5k of the loans are subsidized.

[ShoulderThingThatGoesUp]

Sounds like you save 25% (in your case 26.5%) by putting it into your 401k (marginal tax rate on your first $36,000 of income) and 6% by pre-paying your student loan. So in your shoes I would:
1. max 401ks
2. pay down student loan, because 6% is still pretty high

At your income level it seems like you ought to be able to do both.

[KCM5]

You're planning on paying off the loans at about a rate of $4k/mo. So the $11k you'll put into 401ks next year would help you pay off the loans about 3 months earlier. That will cost you less than $200 in interest. Putting the $11k into tax deferred accounts will save you at least $1650 in taxes (assuming 15% tax bracket, but you may be in the 25% bracket depending on how your incomes are split as you both file single?). And that's not accounting for your employer match.

I'd stay the course and keep doing what you're doing. But maybe someone else has another opinion on the matter.

[ShoulderThingThatGoesUp]

You're planning on paying off the loans at about a rate of $4k/mo. So the $11k you'll put into 401ks next year would help you pay off the loans about 3 months earlier. That will cost you less than $200 in interest. Putting the $11k into tax deferred accounts will save you at least $1650 in taxes (assuming 15% tax bracket, but you may be in the 25% bracket depending on how your incomes are split as you both file single?). And that's not accounting for your employer match.

I'd stay the course and keep doing what you're doing. But maybe someone else has another opinion on the matter.

Whoops, I said 25% as if they were MFJ. Either way the conclusion is the same.

[StacheInAFlash]

This sounds like almost exactly the same situation my wife and I are in, but we decided to keep contributing a healthy amount to retirement but not maxing out the accounts. We're aggressively paying of $50k in student loans in 20 months (3 months to go!!!), and the extra boost we'd get by dropping retirement down to employer matches only just wasn't worth it to us. I really have enjoyed the motivational boost of seeing progress on both sides of the coin. I would have found it really discouraging to see my retirement fund barely moving during this whole time.

[Catbert]

I'd keep contributing a health amount to your 401ks.  Once 2016 is over you'll never to able to contribute that years max 18K in later years.  I'm not sure I'm phrasing this clearly, but what I mean is that if you don't contribute to a 401k in 2016 you can't double up the following year to make up for it.  But the SL could be paid off in 2017.

Stay the course with your 401k contributions.

[Bucksandreds]

The only caveat in this is the financial flexibility that having no student loan payment affords the borrower. Having no payment means you have more flexibility when it comes to work life balance.  Obviously get the employer 401k match.  Paying the loan is a permanent savings of 6% and the loan payment goes away forever.  Maxing out all retirement vehicles make be an immediate savings of 25% but with the caveat that income taxes will be payed on that money at some point (preferably at a lower rate) and the student loan minimum payment will be present longer.  Taking a company match and saving in a 401k is necessary.  Blatantly writing off the benefits of paying off a student loan is foolish.

[seattlecyclone]

I agree that you should max out your retirement accounts. You'll pay off your loans within a couple of years even if you do, and extending your loan payments won't cause you to pay much more interest than your current plan. Once your loans are gone you can't go back and catch up on this year's 401(k) contributions; it's now or never for those. The tax deferment you get from saving more is likely worth a small amount of extra loan interest.

[mustache you a question]

Thank you all for the advice, I should add that we would like to purchase a house but we won't be doing any of that until we have our student loans paid and have at least 20% down.  Does this change any opinions? 

[ShoulderThingThatGoesUp]

What you plan to do with money in the future has no bearing on what actions will increase your net worth the most now.

Have you looked into student loan refinancing? If you could get the rate below 4% many here would defend maxing the retirement accounts, then building cash savings for a down payment while paying the minimum on your student loans if homeownership makes sense for you.

That's what math indicates. I totally get wanting to not have debt and I don't have a mortgage on my house even though it would most likely be slightly better for my net worth to have one. But the math is so strongly in favor of maxing out 401k accounts that it's hard to justify not doing it.

[RangerOne]

The earlier you can max out your 401k the better off you will likely be. Especially given how little they let you contribute per year. You can pay off student debt with as much money at a time as you want but you will never get your years back to max out your tax deferred investment options.

This is the generally mathematically sound financial advice. However there is something to be said for the emotional freedom of wiping out your debt first though odds are it will leave you a few years behind on retirement.