Author Topic: Student Loans and Roth IRA  (Read 2618 times)

Walkering

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Student Loans and Roth IRA
« on: February 24, 2016, 11:20:37 AM »
I'm returning to school for a masters degree and will be receiving Stafford Unsubsidized loans (interest: 5.84% and processing free: 1.06%). I failed to find a website to answer detailed questions about how student loans work (Do I receive them in a lump sum once a year? Is the processing fee compounded daily like interest? Will I be able to renegotiate the interest once I've graduated?). Are there any good resources that anyone knows about that can explain the nitty gritty? Google searches only give me websites that answer basic questions about student loans :(

Also, does it make sense to be putting money into a Roth IRA while I'm taking out student loans? Or will they just offset each other? 

thanks.
« Last Edit: February 24, 2016, 11:25:07 AM by JMHow01 »

Stairway to Stache

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Re: Student Loans and Roth IRA
« Reply #1 on: February 24, 2016, 11:37:32 AM »
Check with your school's financial aid office and they should be able to help you with the questions on how the aid works. I know for me, when I was an undergrad I received my stafford loans it was in two lump sums, at the beginning of each semester and it was paid directly to my school's student account.

As for your question on whether it makes sense to contribute to your Roth IRA while taking out loans i guess that depends on what kinds of numbers we are talking about here and what other debts you may have, if any and what your expenses are, what other savings you have, etc.

Personally, I would probably look at trying to take out the least amount of debt possible and ignore the roth contributions but you could certainly make an argument and run some numbers where doing the Roth contributions will work out in your favor, just for me personally, owing less now and not having to fight for returns against the interest you'd be borrowing makes more sense to me. I would also rather have 10 - 15k in regular money savings that I could access for any unexpected needs after 2-3 years of grad school rather than 10-15k in a roth account, so I would say if you don't have current savings bucket start filling that first

Remember you can make payments at anytime to your student loans, even while in school so you don't have to take the maximum that they approve you for and / or if you find out you don't need all of the loan you can pay a chunck back too.

Stairway to Stache

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Re: Student Loans and Roth IRA
« Reply #2 on: February 26, 2016, 10:37:13 AM »
I thought I would as well, as this might change the calculation if you are eligible for the retirement savings tax credit and by how much. I remember my first year after finishing undergrad receiving this tax credit for simply adding money to an IRA and I think it is still available. It has income limits, which is why I qualified for it then but don't anymore and have forgotten about it but in your case it might be worth checking.

JumpInTheFIRE

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Re: Student Loans and Roth IRA
« Reply #3 on: February 27, 2016, 06:19:44 PM »
I would also rather have 10 - 15k in regular money savings that I could access for any unexpected needs after 2-3 years of grad school rather than 10-15k in a roth account, so I would say if you don't have current savings bucket start filling that first

You can always withdraw direct Roth contributions without penalty so it can act as a "super emergency" fund if needed.  I would still maintain an emergency fund as there is always the possibility of losing money in the Roth account and it sucks to be forced to sell when you don't want to, but the e-fund shouldn't need to be as large if you also have $16.5k of Roth contributions you can tap if need be.

However, for the original poster, I wouldn't contribute to a Roth if I was taking out loans to live on (at least not at that interest rate), I would just take out smaller loans. 

MustacheAndaHalf

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Re: Student Loans and Roth IRA
« Reply #4 on: February 27, 2016, 08:55:53 PM »
Also, does it make sense to be putting money into a Roth IRA while I'm taking out student loans? Or will they just offset each other?
You need to have earned income to contribute to a Roth IRA.  Are you working and going to school?

Stairway to Stache

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Re: Student Loans and Roth IRA
« Reply #5 on: March 01, 2016, 01:13:28 PM »


I would also rather have 10 - 15k in regular money savings that I could access for any unexpected needs after 2-3 years of grad school rather than 10-15k in a roth account, so I would say if you don't have current savings bucket start filling that first

You can always withdraw direct Roth contributions without penalty so it can act as a "super emergency" fund if needed.  I would still maintain an emergency fund as there is always the possibility of losing money in the Roth account and it sucks to be forced to sell when you don't want to, but the e-fund shouldn't need to be as large if you also have $16.5k of Roth contributions you can tap if need be.

However, for the original poster, I wouldn't contribute to a Roth if I was taking out loans to live on (at least not at that interest rate), I would just take out smaller loans. 

You also need to have unlocked your Roth IRA with the 5 year rule. So in this case, if they don't currently have a Roth IRA they would need to wait 5 years before being able to remove contributions penalty free. Just want to clarify the use of "always".

DK

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Re: Student Loans and Roth IRA
« Reply #6 on: March 04, 2016, 06:51:56 AM »
Contributions don't have this restriction....rollovers, and earnings withdrawals post 59.5 do.