Author Topic: Pay off $17k student loan or max out 401k this year?  (Read 846 times)

sizzlinkola

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Pay off $17k student loan or max out 401k this year?
« on: July 31, 2019, 08:04:11 PM »
Just landed a new job at a tech startup. I'm trying to decide if I should pay off my federal student loan ($17k @ 3.8% fixed) or max out 401k with 4% match for the remainder of this year.

I'm leaning more towards paying off my loan while doing the 401k match since startups can be unstable. I could also pursue both, but my loan would take longer to pay off.

Any thoughts?

nereo

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #1 on: July 31, 2019, 08:17:22 PM »
The Investment Order will give you some guidance here. 
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Personally, I would max out my 401(k) and IRA first before paying down a loan at 3.8% (and who's interest you might be able to deduct from yourtaxes).

Note: Your 401(k) will not be affected if your startup goes belly up, though you might be out of a job if that happens.  Speaking of unemployment, step '0' in the 'Investment Order' is to have an E-fund for just such an occurance.

Steeze

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #2 on: July 31, 2019, 08:20:05 PM »
Check out the investment order thread

401k match
Emergency Fund
High interest debt >5%
IRA max (or Roth)
401k max
Low interest debt <5%
Taxable investments

Donít make extra payments on low interest debt. Just save up until you have a lump sum to pay it off. That keeps your emergency fund at a good level.

A low interest fed loan is not a big deal and has very favorable terms and protections. I wouldnít be too worried about paying it off so soon. If that is your only debt you are in great shape.

Diotima245

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #3 on: August 01, 2019, 04:39:11 AM »
Check out the investment order thread

401k match
Emergency Fund
High interest debt >5%
IRA max (or Roth)
401k max
Low interest debt <5%
Taxable investments

Donít make extra payments on low interest debt. Just save up until you have a lump sum to pay it off. That keeps your emergency fund at a good level.

A low interest fed loan is not a big deal and has very favorable terms and protections. I wouldnít be too worried about paying it off so soon. If that is your only debt you are in great shape.

I'm curious I'm about to close on a home and rates are low. Would you apply the same ethos on not making extra payments on a low rate mortage?

nereo

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #4 on: August 01, 2019, 05:44:07 AM »

I'm curious I'm about to close on a home and rates are low. Would you apply the same ethos on not making extra payments on a low rate mortage?

Yes.

Steeze

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #5 on: August 01, 2019, 05:50:31 AM »
Check out the investment order thread

401k match
Emergency Fund
High interest debt >5%
IRA max (or Roth)
401k max
Low interest debt <5%
Taxable investments

Donít make extra payments on low interest debt. Just save up until you have a lump sum to pay it off. That keeps your emergency fund at a good level.

A low interest fed loan is not a big deal and has very favorable terms and protections. I wouldnít be too worried about paying it off so soon. If that is your only debt you are in great shape.


I'm curious I'm about to close on a home and rates are low. Would you apply the same ethos on not making extra payments on a low rate mortage?

Yeah - in a worst case scenario you canít pay your loan and the bank forecloses on your home. They donít care if you made double payments until you stopped paying. They might even sell the house for less since you owe them less. Itís more of a safety net to keep that extra money in cash or invested in a taxable account until you can eliminate the mortgage all together (or not at all). That way if you fall on hard times you have a big safety net and can stay in your home until your back on your feet. Think of it as a form of unemployment/disability/life insurance.

This is all assuming you are a disciplined saver and will not spend the extra payment on random stuff if you have money in the bank. If you are not I would say go ahead and make the extra payment.

RWD

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #6 on: August 01, 2019, 07:15:28 AM »
Check out the investment order thread

Emergency Fund
401k match
High interest debt >7%
HSA max
IRA max (or Roth)
401k max
Mega backdoor Roth
Slightly less high interest debt >5%
Taxable investments

Fixed that to actually match the investment order post. You need to add the 10-year Treasury note yield to the numbers in the post.

RWD

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #7 on: August 01, 2019, 07:17:31 AM »

I'm curious I'm about to close on a home and rates are low. Would you apply the same ethos on not making extra payments on a low rate mortage?

Yes.

Yes.

CarolinaGirl

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #8 on: August 01, 2019, 11:15:25 AM »
DEFINITELY max out your 401k first.  Your future self will thank you!!

Financial.Velociraptor

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #9 on: August 01, 2019, 03:20:47 PM »
You get match on all 17k in your 401K?  FFS take the money!!!

PDXTabs

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #10 on: August 01, 2019, 03:26:42 PM »
Just landed a new job at a tech startup. I'm trying to decide if I should pay off my federal student loan ($17k @ 3.8% fixed) or max out 401k with 4% match for the remainder of this year.

Unless you really think that you are borderline unemployable I would max out the 401k. Maxing out the 401k will also reduce your AGI which may or may not bring your taxable income down enough to deduct the interest paid on the loan.

Of course, it never hurts to have an emergency fund for if you are laid off.

I'm curious I'm about to close on a home and rates are low. Would you apply the same ethos on not making extra payments on a low rate mortage?

Yes.

Me too, unless you are paying mortgage insurance in which case getting 20~22% home equity might make sense.
« Last Edit: August 01, 2019, 03:29:10 PM by PDXTabs »

therethere

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Re: Pay off $17k student loan or max out 401k this year?
« Reply #11 on: August 01, 2019, 03:33:04 PM »
At those low rates definitely max your 401k. Follow the investment order for the rest.

I paid off all my loans >5% and kept those lower than 5%. This allowed me to max my 401k and also contribute excess money to a brokerage account in good years. It's been about 5 years since I went with this plan. By my pretty detailed accounting I'm ahead about 15k by having what would have been extra payments invested VTSAX in a brokerage account versus paying off my loan. This doesn't even account for the tax savings of maxing my 401k during that time. I'd venture to say I'm actually ahead more like 40k once you factor the 401k tax benefit and earnings in.

The investment order works.