How should I balance paying off my student loans and contributing to a 401(k) plan?
I have over $200,000 in student loan debt. Some people have advised me to focus on paying off the loans, while others have advised me to keep contributing money into a 401(k) plan. How should I balance these two goals?
That must of been some degree you earned! Without knowing your details of income/interest rate on your loans/cash flow it is hard to give you a specific answer so this is a general thought. I would suggest you contribute to your 401k up to the maximum matched amount and then focus on putting everything above and beyond onto the loans. It sounds like you may be just starting out in your work life so some of my reasoning behind this would be:
1) Assuming you are just starting out you probably have a small 401k balance which means even if you earn a high rate of your return you will probably pay more in interest because you are paying it on a bigger balance. For example 10% ROR on 50k = 5k growth but 4% interest on 200k = 8k paid out (your net worth decreased)
2) We are at a high point in the market - equities are at all time highs. Knock off the loans and if we have a reset at some point in the next few years you may have more cash flow to dump into the market at a lower point.
3) Those high debt balances will impact many other aspects of your life - buying a house, having a family etc.. all that debt will bog down your cash flow making it difficult to do anything else.
Good luck and happy new year!
Tom Cymer CFP
President Opulen Financial Group LLC
I can appreciate how overwhelming and confusing it can be to hear conflicting information. I am not certain of your income, age or monthly budget. If possible, I would suggest to contribute enough to receive the full employer match. It is important to accumulate wealth on a tax-deferred basis, as well as pay of your student loans. Many student loan borrowers don't realzie that they can also change their student loan repayment options. A change in payment options will not negatively impact credit scores. Here is a link to the student loan repayment options. https://studentaid.ed.gov/sa/repay-loans/understand/plans
You will also be able to access a helpful calculator.
Good luck to you!
First, here is a great resource on student loan refinancing. If you have federal and private loans then read this resource first. I work with several residents and physicians, and most of them find themselves in your same situation. I would agree with most of what was said previously in that it is best to contribute to your 401(k) enough to receive the company match. Make sure you have an emergency savings account (3-6 months of living expenses first), and then contribue to the 401(k). Once you are receiving the match then pay off any high interest loans (6% interest or more). If you have multiple loans the "snowball effect" really is beneficial. Depending on your income, I would work to get your 401(k) contribution up to at least 10% prior to placing additional funds onto the student loan. Usually the 401(k) match is only 3%, and if you're 10 years down the road to retirement and you have only placed 3% per year into your 401(k) then you will be kicking yourself. Good luck and let me know if you have further questions.
Ordinarily, I advise clients with any non-mortgage debt to focus on paying it off before investing for retirement. After all, for most of us, our greatest wealth building tool is our income, so it's important to limit debts that siphon off chunks of our income each month.
That having been said, I feel your pain about the balance of your student loans. Hopefully a large income comes with that large debt! For folks in your situation, it'd recommend contributing to your 401k enough to capture the match, then focus on keeping your lifestyle in check and hammering away on the student loans. Avoiding lifestyle creep as your income increases will free more of your income for debt service.
I'd imagine that this debt will take a few years to clear, thus the reason it would be nice to have some funds invested in the 401k during the process. Trying to do a larger 401k contribution prior to paying off the student loans will just drag the repayment process out even longer! Fight the fight; finish the race; keep the faith! Stay the course and you can rid yourself of the debt and really begin to build wealth.
Best of luck and please reach out if you have any other questions!
That depends on your current and probable future income.
You should start by looking at the different Student Loan Forgiveness programs out there. You do have a large amount of loans and if your income remains low, it might be hard for you to pay them off. For example, you could keep your payments at 10% of income and have your debt forgiven after 20-25 years or earlier in some cases.
If your income is already high, then I would take the match you are getting from work if any. I would then be very aggressive in paying the debt down. Any type of debt will work against you when trying to become financially successful. It might congest your cash flow and make you feel trapped. Or, it might stop you from getting necessary financing for a real estate property you would to purchase in the future. Getting rid of debt would free up any obstacle.
I hope this helps.