Reducing 401K contribution to pay student loans

[SomeGuyOnTheWeb]

There are some pretty smart people here, so help me out

I'm trying to decide if I should cut down my 401K contributions to pay down my student loans quicker, specifically the higher interest rate ones. Currently, 6% of my check goes to my 401K. My employer currently matches up to 3% dollar-for-dollar, and then matches half afterwards up to 6% after the initial 3% contribution (so if I contribute 6%, my employer contributes 4.5%). My current balances and interest rates on my student loans outstanding are as follows.

DLSTFD, $1,233.76, 2.330%
DLSTFD, $2,611.90, 6.000%
DLSTFD, $4,772.47, 2.330%
DLUNST, $2,097.69, 2.330%
DLSTFD, $6,199.92, 6.800%
DLSTFD, $6,199.85, 6.800%

I currently make approximately $32K per year. I'm thinking that I would be better served simply dedicating 3% to my 401K since my employer will match it in full, and then taking the other 3% that my employer only half matches I'm currently putting into a 401K to pay down some of the higher rates loans, mainly the 6.8% ones. Good idea or not?

[compassion101]

No, continue to contribute the 6% and it's not even close.

Even after the 6% if you have more money to put towards savings/debt  I'd still be putting more money into stock investments (I'd probably open a roth IRA rather than put the extra into your 401k) rather than paying them off early, even the 6% ones. But at least that's relatively close.

[SomeGuyOnTheWeb]

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@compassion101 wrote:

No, continue to contribute the 6% and it's not even close.

Even after the 6% if you have more money to put towards savings/debt  I'd still be putting more money into stock investments (I'd probably open a roth IRA rather than put the extra into your 401k) rather than paying them off early, even the 6% ones. But at least that's relatively close.

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You're correct. I just went on my company website and checked what the rate of return was (didn't know it existed until today!) and it turns out it's 7.79% from 01/01/2014 - 07/03/2014. However, I don't understand investing in a roth IRA vs paying off the higher balance student loans. I'm no financial expert by any means, but what's the benefit of doing that?

[compassion101]

In a roth you have many moire investment options than your 401k. In your 401k you normally choose mutual funds, which can keep 1% or more of your returns per year (compounded this is a huge amount lifetime). In a roth you can invest in individual stocks with no fees (just a small transaction fee which is usually waived for a period of time when you first sign up) or exchange traded funds (ETFs) which are similar to mutual funds but have much smaller fees usually (SPY I beleive is less than 1/10th of a percent.)

If you are going with all stocks or ETFs (no bonds etc.) you can probably average 8% per year, which is greater than the 6% on your highest student loans. If you are losing sleep over having the student loans then obv you have to consider that too as a cost of the loans. But a better way is to look at the logical picture and accept the loans as debt without losing sleep. Another advantage is that once the money is in your 401k/IRA, it cannot be touched. So let's say things go bad in your life and you lose your job and cannot find another one and run up bills. With the threat of BK looming, you will always be able to keep your 401k/IRA money. They won't touch it. Although you can't dismiss your student loans in BK normally, the federal ones will work with you on delaying payments and the private ones, well if you have no money then there won't be anything they can do, they can't touch yopur retirement assets. That's just a side thought that I would be more comnfortablke with more retirement funds and more debt rather than less of each.

As for your rate of return on the investments, you should look at the long picture when considering your best allocation of funds rather than what you return is from jan-jul 2014. They won't always be 7.79% over 6 months, that is rather high as it's 16% per year. But the market is good right now. Sometimes the market will be bad. But you can attain 8%ish as an average till later in life when you need to put some of your money in more conservative investments with less fluctuation, at that point you will average less.

[wa3more]

+1 on what Compassion said.

Not even a discussion.

[Anonymous]

If I may co-opt this thread for a related question...what about borrowing to fund an IRA? I'm a student and I don't make enough to make the full IRA contribution each year and still pay for college. I could take out additional private student loans ($11,000) to be able to make the contributions for two years I'd otherwise miss. Is that a wise decision, given variable interest rates and whatnot?

[compassion101]

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@Anonymous wrote:
If I may co-opt this thread for a related question...what about borrowing to fund an IRA? I'm a student and I don't make enough to make the full IRA contribution each year and still pay for college. I could take out additional private student loans ($11,000) to be able to make the contributions for two years I'd otherwise miss. Is that a wise decision, given variable interest rates and whatnot?

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That's an interesting question. Aren't private student loans a pretty high interest rate like 6-8%? I doubt I would do that

[Anonymous]

It is possible to get private loans at reasonable rates; Sallie Mae, for example, has as low as a 5.49% APR for fixed interest rate loans and variable rates as low as 2%. You can definitely beat that with stock investments in the long term, especially since Roth IRA growth and distribution is tax free. Obviously, I would only do this if I was actually offered a rate like that. It's not so much that private student loans have inherently bad rates, it's just that most students have poor credit when they start borrowing.

[wa3more]

I'm not sure i would do this. I think it wil be hard to get a 6% after tax return to make this work going forward

This is more of a gamble or speculation. Avoid going into debt.

Remember the lost decade? From 2000 to 2013, the S&P went no where. Zero return for 13 years.

[Stylez]

If  your company is matching up to 6%, then you have to contribute at least 6%. You're giving away too much money if you don't.