Author Topic: Which to Pay Down First: Student Loans or 401k Loan  (Read 3809 times)

CHOPAG

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Which to Pay Down First: Student Loans or 401k Loan
« on: December 28, 2013, 09:45:52 AM »
I have two different types of loans, and I'm trying to figure out which to pay down first.

Student loans: 6 different loans totaling 41K, all at 6.55%, total monthly payments $245
401k loan: 19.5K at 4.25%, monthly payment $102

I'm projecting that I'll be able to put $1500-2000 toward extra payments each month.

Additional Info
-My job is pretty secure. I have a sense of my bosses' retirement schedules, I'm well liked by my superiors all the way up the line, getting raises, etc. I would like to have the option to move on by the end of next year 2015, but I would only do so for a great opportunity. I'm not in a hurry to leave.
-To max my workplace's 401k contributions, I put in 6%, they put in 13%, so even without extra 401k loan payments, I'm putting money into my 401k every paycheck.
-I won't be able to deduct student loan interest in 2014.

Since the interest rate on the student loans is higher than that on the 401k loan, it seems like paying on the student loans first makes sense. However, I think I should be taking future returns on the 401k loan repayments into consideration in addition to the 401k loan interest rate. How should market returns affect my math on this?
« Last Edit: December 28, 2013, 10:15:16 AM by CHOPAG »

Daleth

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #1 on: December 28, 2013, 09:53:58 AM »
The 401k loan, because as I understand it, you can't leave (whether by resigning or by being laid off or fired) without immediately having to pay it all back. If you want to be free to move on in a year, you need to have that $19.5k paid off within a year.

And then of course there's the future returns issue... another argument in favor of paying the 401k loan off first.

girly mustache

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #2 on: December 28, 2013, 10:07:38 AM »
The 401k loan, because as I understand it, you can't leave (whether by resigning or by being laid off or fired) without immediately having to pay it all back.

+1

CHOPAG

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #3 on: December 28, 2013, 10:14:37 AM »
I guess my brain is already in 2014. I meant that I want to have the option to leave at the end of 2015. Does that change the advice at all?

iamlindoro

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #4 on: December 28, 2013, 10:29:48 AM »
I guess my brain is already in 2014. I meant that I want to have the option to leave at the end of 2015. Does that change the advice at all?

No, because you have to plan for your worst case scenario, not your best one-- 19.5K paid off at 1.5K a month will take you into 2015, and shit happens that can prevent you making accelerated payments according to plan.  Only the 401k loan has potential short term consequences.

If you pay it off by late this year, then switch that money over to your student loans.

fodder69

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #5 on: December 28, 2013, 11:02:47 AM »
+1 on the 401k Loan. One plus is that the 401k loan does not count on your credit score so if you needed to raise your credit score for some reason it might make some sense to pay the student loans first.

What will actually happen if you lose your job is the loan is due. If you can't pay it back immediately it gets treated as a disbursement, meaning you will owe taxes on it as income and probably suffer a 10% penalty but that can potentially be avoided if a qualifying event happens.

CHOPAG

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #6 on: December 28, 2013, 11:12:38 AM »
Thanks for all of your responses so far. It sounds like all votes are for paying off the 401k loan given my current circumstances. If it were just a comparison of the math of the guaranteed 6.55% return of paying off the student loans versus the guaranteed 4.25% return plus (or minus) market returns of paying off the 401k loan, how would I calculate that?

Daleth

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #7 on: December 28, 2013, 12:22:32 PM »
Thanks for all of your responses so far. It sounds like all votes are for paying off the 401k loan given my current circumstances. If it were just a comparison of the math of the guaranteed 6.55% return of paying off the student loans versus the guaranteed 4.25% return plus (or minus) market returns of paying off the 401k loan, how would I calculate that?

You wouldn't, haha. You'd just pay off your 401k loan first.

CHOPAG

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Re: Which to Pay Down First: Student Loans or 401k Loan
« Reply #8 on: December 28, 2013, 01:18:56 PM »
Thanks for all of your responses so far. It sounds like all votes are for paying off the 401k loan given my current circumstances. If it were just a comparison of the math of the guaranteed 6.55% return of paying off the student loans versus the guaranteed 4.25% return plus (or minus) market returns of paying off the 401k loan, how would I calculate that?

You wouldn't, haha. You'd just pay off your 401k loan first.

Ha! Touché. I guess I've got my marching orders. Thanks, all.