topic Re: Pay more to student loan or 401k in Personal Finance

Pay more to student loan or 401k

Anonymous — Sat, 27 Apr 2019 12:54:09 GMT

I have around 7 years to retire. Right now I have $70,000 in student loan at 4%. Paying $300 a month graduated payments. Will go up in another 2 years.

I pay 5% now into 401k. Was thinking to put more in. Probably around 20%. Keep paying minimum on student loan then in 7 years take partial lump sum and pay remaining student loan and get rid of that payment then.

Or or should I keep 401k at 5% and tackle the student loan?

Re: Pay more to student loan or 401k

Anonymous — Sat, 27 Apr 2019 14:28:25 GMT

Curious to hear what others say. I'd recommend putting no extra money toward the SLs and place all available extra cash toward retirement. I'd have a different recommendation if the interest rate on your loans was higher (e.g. 7%).

If you do not have an IRA, you might want to consider that along with the increased amount to your 401k, since you'll have a far broader range of fund choices and they may very well have lower expenses and fees.

Re: Pay more to student loan or 401k

Shooting-For-800 — Sat, 27 Apr 2019 15:04:36 GMT

I would increase savings and keep both the same for cash flow emergencies.

Re: Pay more to student loan or 401k

Anonymous — Sat, 27 Apr 2019 15:27:22 GMT

@Anonymous wrote:
I have around 7 years to retire. Right now I have $70,000 in student loan at 4%. Paying $300 a month graduated payments. Will go up in another 2 years.

I pay 5% now into 401k. Was thinking to put more in. Probably around 20%. Keep paying minimum on student loan then in 7 years take partial lump sum and pay remaining student loan and get rid of that payment then.

Or or should I keep 401k at 5% and tackle the student loan?

How many years of payments remain on student loans? After 25 years or so (depending on repayment plan) they will discharge the remaining balance.

Re: Pay more to student loan or 401k

Revelate — Sat, 27 Apr 2019 19:56:35 GMT

401K I would max out vs. a 4% or lower balance. Probably 6% is my line personally for that calculation.

Cash reserves, I am seriously of two minds of that for anyone with credit cards and a stable market for your employable skills, but I dump all spare cash into a brokerage account anyway... admittedly recently with my being kinda skeptical of the market and the majority of my assets being there anyway I've started throwing money at the car that I purchased: I don't think I have the 3 gigs for that much longer but not really in mental shape to be investing right now (actually this forum adventure today is explicitly my NOT working trying to recover) and I did realize if I pay off my debt my mandatory cost of living basically drops well below the poverty line for Los Angeles which is not a bad place to be financially.

Guess what I'm trying to say is there's really no 100% correct answer other than not spending all incoming money: build reserves, pay off debt, or build your investments... it's all better than buying a new TV (or a new car but I ain't perfect).

Re: Pay more to student loan or 401k

Green456 — Mon, 29 Apr 2019 12:19:29 GMT

You need to obtain terms of the loan and figure out the math here and then ask yourself do you need to retire in 7 years or 8 years would be okay too?

$70,000 over 7 years is $1,000 a month. That's a lot of money. But by pushing retirement by 1 extra year, your monthly payment would go down to $730 a month. If you push your retirement by 2 years then you are looking at $650.

Another benefit of pushing retirement is to get extra money in social security and 401K.

Now if you decide not to pay off the loan before retirement then you may maximize 401k by extra $70,000 which gives you extra monthly income of 4% of 70,000 = $200 a month. Remember that if this is a school loan, then your social security and 401k will count as income and you still be required to make payments of 15% of your income.

IMO, I would pay down the loan as fast as I can. The only reason why I wouldn't pay down the loan if the interest was close to 0-1%. The reason is that 401k is likely to grow faster. If interest is anything over 2% then it would be probably better to pay it off. As 401k grows at 4% after inflation and then you have to pay taxes on your income, you are likely at 3% of pure income.

Another thing to consider is that economy goes up and down. Just because you have a growth of 7% in one year doesn't mean that next to years that is going to happen. But loan interest stays them same. At some point paying off the loan, you give yourself money by paying off the interest faster.

Re: Pay more to student loan or 401k

CreditInspired — Mon, 29 Apr 2019 14:22:45 GMT

@Anonymous wrote:
I have around 7 years to retire. Right now I have $70,000 in student loan at 4%. Paying $300 a month graduated payments. Will go up in another 2 years.

I pay 5% now into 401k. Was thinking to put more in. Probably around 20%. Keep paying minimum on student loan then in 7 years take partial lump sum and pay remaining student loan and get rid of that payment then.

Or or should I keep 401k at 5% and tackle the student loan?

IMHO, if I were you, I would tackle the student loan with gusto while you’re still working.

Why? I took early SS at 62.5 and the best thing I did was pay off ALL my outstanding debt prior to taking the plunge. It is absolutely a glorious feeling to have no debt or money worries while retired.

So as as others have said, other factors come into play. So you do have to play with the numbers and see what works best for you. Find out what your estimated monthly SS will be at full retirement age. Get an idea whether you’ll downsize, stay in the same area, or if you plan to do any traveling. Play with the numbers. What is your other debtload? Is it lightweight or heavy duty. All these things come into play.

Also, definitely make sure you’re putting enough in your 401K to get employer’s match. Don’t leave money on the table. Another option could be to increase 401K to 10% and put extra 10% toward SL.

Also, kudos to you for planning this 7 years out.

Re: Pay more to student loan or 401k

Revelate — Tue, 30 Apr 2019 13:46:57 GMT

Actually inflation makes the loan “cheaper” as well.

I think my conventional numbers still hold when we are talking long term: inflation gets factored into both so I think we are talking top line numbers though I have never tried to math that out.

Also long term equity return 6% is likely a legitimate number to use: it’s the short term which is where I am struggling personally when it comes to market analysis: serious holding pattern till something really good or really bad happens haha.

Re: Pay more to student loan or 401k

iced — Tue, 30 Apr 2019 15:55:37 GMT

@Revelate wrote:
Actually inflation makes the loan “cheaper” as well.

I think my conventional numbers still hold when we are talking long term: inflation gets factored into both so I think we are talking top line numbers though I have never tried to math that out.

Also long term equity return 6% is likely a legitimate number to use: it’s the short term which is where I am struggling personally when it comes to market analysis: serious holding pattern till something really good or really bad happens haha.

I would agree. The only situation where putting into long-term investments is going to lose out to paying short-term debt is when the interest is exhorbitant and the time needed to pay it off is long. Any debt that can be cleared in 2-3 years isn't worth sacrificing long-term savings, and I would put the line in the interest sand closer to 10%, though I would say that number also slides depending on how much other long-term savings is done.

For example, if someone's already putting $20,000/year away for retirement and has some nest egg that's growing, easing up on savings for a bit to wipe out a 7% interest debt is going to be a smart thing to do. However, someone putting $0, or nearly $0, away for later who has only a little in total savings (less than $100,000 if they're under 30) is already in bad shape and postponing even more doesn't make sense to wipe out a 7% interest debt. That individual should prioritize the 401k.

Re: Pay more to student loan or 401k

Anonymous — Tue, 30 Apr 2019 18:59:35 GMT

Life isn't perfect. If your student loans are through the federal government I wouldn't pay anything extra on them at any time.

I would increase both savings and your 401k.

You have to think about it if everything went to hell tomorrow. And if everything went to hell tomorrow you can contact the federal government and have a variety of payment options on your student loans.

But if you put a lot of money into your student loans now and all hell breaks loose tomorrow that money won't be in your retirement and it won't be in the savings to help you.

Re: Pay more to student loan or 401k

Green456 — Wed, 01 May 2019 00:08:17 GMT

@Anonymous wrote:
Life isn't perfect. If your student loans are through the federal government I wouldn't pay anything extra on them at any time.

I would increase both savings and your 401k.

You have to think about it if everything went to hell tomorrow. And if everything went to hell tomorrow you can contact the federal government and have a variety of payment options on your student loans.

But if you put a lot of money into your student loans now and all hell breaks loose tomorrow that money won't be in your retirement and it won't be in the savings to help you.

Another way to think about it. If hell breaks tomorrow, you will loose your 401k but your student debt at 7% interest will be still there.

Re: Pay more to student loan or 401k

CreditInspired — Wed, 01 May 2019 00:47:01 GMT

@Green456 wrote:
@Anonymous wrote:
Life isn't perfect. If your student loans are through the federal government I wouldn't pay anything extra on them at any time.

I would increase both savings and your 401k.

You have to think about it if everything went to hell tomorrow. And if everything went to hell tomorrow you can contact the federal government and have a variety of payment options on your student loans.

But if you put a lot of money into your student loans now and all hell breaks loose tomorrow that money won't be in your retirement and it won't be in the savings to help you.
Another way to think about it. If hell breaks tomorrow, you will loose your 401k but your student debt at 7% interest will be still there.

Now isn't that the pitiful truth!

Re: Pay more to student loan or 401k

Anonymous — Wed, 01 May 2019 01:14:20 GMT

Student loan is actually 4%

If I were to put more to retirenment and savings and keep paying minimum on the SL, when I retire in 7 years would you pay off the loan with a lump sum from the 401K or keep making payments on the SL?

Re: Pay more to student loan or 401k

iced — Wed, 01 May 2019 01:16:32 GMT

@Green456 wrote:
@Anonymous wrote:
Life isn't perfect. If your student loans are through the federal government I wouldn't pay anything extra on them at any time.

I would increase both savings and your 401k.

You have to think about it if everything went to hell tomorrow. And if everything went to hell tomorrow you can contact the federal government and have a variety of payment options on your student loans.

But if you put a lot of money into your student loans now and all hell breaks loose tomorrow that money won't be in your retirement and it won't be in the savings to help you.
Another way to think about it. If hell breaks tomorrow, you will loose your 401k but your student debt at 7% interest will be still there.

If there was enough hell to entirely wipe out equities/retirement savings (including 401k), I'll wager it was also sufficient to wipe out the systems holding student loan debt.

The key, already mentioned, is to keep enough in guaranteed positions to weather a market downturn, then you can let the riskier assets ride the storm and come out ahead. People only "lose" their 401k savings when they panic and liquidate their positions that dropped. There has never been a downturn that did not result in positions returning to and indeed exceeding where they once were after a few years.

Re: Pay more to student loan or 401k

iced — Wed, 01 May 2019 01:18:27 GMT

@Anonymous wrote:
Student loan is actually 4%

If I were to put more to retirenment and savings and keep paying minimum on the SL, when I retire in 7 years would you pay off the loan with a lump sum from the 401K or keep making payments on the SL?

Depends on your 401k. If you're getting >7% YoY returns on your 401k, keep making payments. If you're not, pay off the SL.

Re: Pay more to student loan or 401k

Anonymous — Wed, 01 May 2019 04:45:53 GMT

When I say hell breaks loose I'm speaking about losing a job or a business shutting down. Things that cause your income to no longer be present.
401k and savings are rarely affected by that.

Re: Pay more to student loan or 401k

Green456 — Wed, 01 May 2019 12:52:21 GMT

@Anonymous wrote:
When I say hell breaks loose I'm speaking about losing a job or a business shutting down. Things that cause your income to no longer be present.
401k and savings are rarely affected by that.

That’s what 6-12 months emergency found is for. And I agree this should be the priority but your 401k should never be cashed before retirement.

Re: Pay more to student loan or 401k

Anonymous — Wed, 01 May 2019 20:15:49 GMT

I agree with not Cashing Out 401K until retirement but sometimes things happen. And many times you can do a loan against 401k if necessary.