Pay off $17k student loan or max out 401k this year?

[sizzlinkola]

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?

 

[Senator]

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?

Max out the 401K. Then put an extra $500 a month on the student loans.

 

[rk911]

pay off the debt.

 

[njhowie]

Max out 401k and then put as much as you can towards the loan.

Your income tax rate/bracket/guaranteed return, even excluding the 4% match, is higher than 3.8%.

 

[aaronc879]

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?

I would make sure to have 6 months of expenses saved in cash since you are more likely to become unemployed than most people. Then I would save in the 401K up to the full match. Then I would put any additional savings into cash until you have enough to pay off the loan in full. I would NOT pre-pay the loan unless you can pay it all off. You don't want to put your savings toward the loan then lose your job before the loan is paid off. That would result in still having the same loan payment with no income and that's bad.

 

[Red Badger]

I would make sure to have 6 months of expenses saved in cash since you are more likely to become unemployed than most people. Then I would save in the 401K up to the full match. Then I would put any additional savings into cash until you have enough to pay off the loan in full. I would NOT pre-pay the loan unless you can pay it all off. You don't want to put your savings toward the loan then lose your job before the loan is paid off. That would result in still having the same loan payment with no income and that's bad.

+1. I think this is the best balance. It might cost a bit more overall, but its the safest glide path out of debt.

 

[imp4]

In this situation I would definitely max out your 401k first, if simply for the reason that your time horizon is so long.
The reality is that you'll pay off the student loan over the next few years but you won't get back those several years of 401k compounding if you choose to pay off the student loan now.

 

[RunningBum]

I would make sure to have 6 months of expenses saved in cash since you are more likely to become unemployed than most people. Then I would save in the 401K up to the full match. Then I would put any additional savings into cash until you have enough to pay off the loan in full. I would NOT pre-pay the loan unless you can pay it all off. You don't want to put your savings toward the loan then lose your job before the loan is paid off. That would result in still having the same loan payment with no income and that's bad.

+2. Very sound and convincing reasoning here.

 

[Mdlerth]

So easy a caveman could do it

Let's clarify something. You mention a 3.8% interest on the student loan vs a 4% match on the 401k. Those numbers are not comparable in any sense, as they represent totally different quantities.

The 3.8% interest means you pay 3.8% on $17k of the balance of your student loan. If you pay off the loan you'll avoid paying that interest, which in essence earns you a 3.8% return.

The "4%" match is going to be something like 100% match on 4% of your pay, right? That's a 100% return, instantly.

It's not a question of comparing a 3.8% return vs 4% return, it's a question of comparing a 3.8% return vs a 100% return. I know which one I would choose.

 

[kgtest]

Congrats on landing a tech job with only 17k of debt. That is impressive.

If it were me...I might do the 401k match minimum, then possibly contribute to Roth, and then pay the student loan debt.

So if your salary is $60,000

Contribute 4% to 401k
Contribute 10% to Roth IRA
Then 10% to your student loan debt.

IF your income is higher, in the 22% bracket...substitute the Roth contribution for paying down more debt or 401k contribution...fielders choice, maybe split the difference.

As a young investor it's important to read up on risk tolerance and asset allocation. You should be tilted towards 90% stocks starting out IMHO.

 

[MBAustin]

I would make sure to have 6 months of expenses saved in cash since you are more likely to become unemployed than most people. Then I would save in the 401K up to the full match. Then I would put any additional savings into cash until you have enough to pay off the loan in full. I would NOT pre-pay the loan unless you can pay it all off. You don't want to put your savings toward the loan then lose your job before the loan is paid off. That would result in still having the same loan payment with no income and that's bad.

+3

 

[ERD50]

...

The "4%" match is going to be something like 100% match on 4% of your pay, right? That's a 100% return, instantly.

It's not a question of comparing a 3.8% return vs 4% return, it's a question of comparing a 3.8% return vs a 100% return. I know which one I would choose.

Absolutely. And another plus to aaronc879, especially on saving enough to pay the loan off all at once, rather than a little at a time, for the reason he gives.

That said, I would not be too concerned with a 3.8% fixed loan, that's not bad.

Anyone else notice: Those who say "pay off the loan!", just say it, they don't provide any basis for it? But those who don't automatically jump to the "all debt is bad" mantra actually provide the reasons behind it. I find that interesting.

-ERD50

 

[pacergal]

What are the stipulations on your student loan? Is it currently in deferment or generating interest? Usually you have 6 months after graduation before payback time begins, for most student loans, you can't ignore the payback time in order to save money to pay in full later.

You didn't state what your income will be, I would prioritize contributions to 401 up to the match, save anything else that you can, start the loan payoff, and live below your means with the rest.

 

[FIRED2018]

Anyone else notice: Those who say "pay off the loan!", just say it, they don't provide any basis for it? But those who don't automatically jump to the "all debt is bad" mantra actually provide the reasons behind it. I find that interesting.

-ERD50

ERD50, your references to “those who” and “they don’t” left me thinking there were many such dogmatic posts to payoff the loan. So I counted just one, maybe I missed some?

OP: Payoff the loan is reasonable though the math favors getting the matching investment money from the employer as the higher priority. Overall I believe there is no need to try to improve upon Mr. aaronc879, he did a great overview of priorities for this invest vs payoff question.

 

[Aerides]

OP I'm assuming you are quite young - mid 20's, and have no other debt besides this loan. You also don't say how much discretionary income you have after expenses, so I'd do the following in your shoes:

Contribute 4% to your 401k now to at least get the match. It will feel like only a 3% of a difference in your paycheck
Save cash, (in a bank account paying some interest, 2%+) until you have 6 months of expenses put aside
Any extra - start paying down the loan, and increase that payment once you have that 6 month egg saved up
Then once the loan is paid, max your 401k to the annual cap each year
Then once you are doing the cap, have no debts, start a taxable investment account (and come back here for help with that too)

That's my advice to anyone starting from zero, or near zero, as I assume you are. The 6 months cash thing is crucial so you don't have to incur new debt if SHTF - because it can and will in life, no matter if you have a cushy cozy job or take a risky one.

A cushion isn't sexy until you need it.

 

[ERD50]

ERD50, your references to “those who” and “they don’t” left me thinking there were many such dogmatic posts to payoff the loan. So I counted just one, maybe I missed some? ...

Only one in this thread, but they pop up all over this place. Most with a "just do it" approach, no other reasoning other than it might "feel good". And they assume everyone would feel the same. I feel good with the liquidity and having my money working for me.

-ERD50

 

[jollystomper]

I would make sure to have 6 months of expenses saved in cash since you are more likely to become unemployed than most people. Then I would save in the 401K up to the full match. Then I would put any additional savings into cash until you have enough to pay off the loan in full. I would NOT pre-pay the loan unless you can pay it all off. You don't want to put your savings toward the loan then lose your job before the loan is paid off. That would result in still having the same loan payment with no income and that's bad.

+4

Do not worry and the loan interest. You can borrow for a lot of things but not borrow for your retirement. After the emergency fund, maximize your future retirement savings, and pay the loan as normal. If you get a bonus or unexpected income, or your savings rate becomes very good you can choose to put some of the "excess" towards paying more than the loan monthly payment.

 

[HI Bill]

Contribute 4% to your 401k now to at least get the match. It will feel like only a 3% of a difference in your paycheck
Save cash, (in a bank account paying some interest, 2%+) until you have 6 months of expenses put aside
Any extra - start paying down the loan, and increase that payment once you have that 6 month egg saved up
Then once the loan is paid, max your 401k to the annual cap each year
Then once you are doing the cap, have no debts, start a taxable investment account

+0.8. I agree with all of the above, except the last one. After maxing the 401(k) and saving up 6 month's expenses, and paying off your loan, I'd max out a ROTH IRA first, and then taxable investment account!

 

[ncbill]

In the U.S.?

Eligible to join the National Guard?

https://www.nationalguard.com/tools/student-loan-repayment-program

 

[jIMOh]

Max out 401k and then put as much as you can towards the loan.

Your income tax rate/bracket/guaranteed return, even excluding the 4% match, is higher than 3.8%.

+1
401k up to the match, for sure
I would max the 401k and put some extra to the loans

what is the repayment period on the loans? My loans had a 10 year repayment period?
where do you see yourself in 3 years?
Does the match have a vesting period?

 

[pb4uski]

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?

401k money should be separate from company money so the stability of the startup should not be an issue unless they are not following the rules.

I would put whatever you need to in the 401k to maximize the match... so I guess 4% of your pay would result in a 4% match... and put the rest towards the student loan after having an emergency fund of some sort in an online savings account at 2% or more.

If you have a choice between a regular 401k or a Roth 401k and you are in the 12% tax bracket or less.... go with Roth.