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?
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.
There are pros and cons to focusing on either you student loan debt or 401k plan. I totally get the urge to get out from under $200,000 of student loan debt.
Big Question- does your employer off a 401k match? If they do - you should contribute at least enough to get the full match. This will allow some of the magic of compounding interest work for you. You will also save a little money on taxes - and not end up 50 and woefully behind when it comes to saving for retirement.
Second- put the rest of the money you can towards you student loans. Depending on your income making a ton of headway may be rough. But look for ways to cut expenses while still enjoyig life (a bit). I just spoke with someone who paid off $30,000 of student loan debt in one year on $48,000 income. The sacrifices he made to do this - aren't things I could honestly recomend everyone do- but all the same it is amazing how much debt you can pay off quickly if you set you mind to it.
Wow, this can be a tough call. Here are some steps to making the decision.
1. What is the interest rates on the debt? Can you reasonably make more in your investments than you are paying on the interest in debt? The answer is likely no, not without taking on excessive debt.
2. Do you qualify for any federal/state/or job specific relief? If so make sure your taking advantage of all the programs out there.
3. How do you feel about debt? I personally do not like the feeling of debt and prefer to have it paid off as soon as possible. I am also very reluctant to take it on; school debt is sometimes a necessary evil and an investment in your future.
Hope that helps some, best of luck.
You'll probably want to look at working towards both at the same time. Paying off 200k in student loan debt isn't going to happen overnight, neither is saving for retirement. Without knowing your cash flow, interest rate, and other assets, it's hard to give definitive advice in either direction.
However, keep in mind that you're limited to what you can contribute to tax-advantaged retirement account every year. If you forego making contributions into a retirement account, those lost years can never be reclaimed. As long as you're not accumulating more debt due to high interest, and making progress on paying down the principal, you should consider contributing to your 401(k).
On the flip side, ensuring you're making progress on student loans is important for other areas of your finances. Qualifying for a mortgage, or borrowing money for starting a business, etc.
You'd want to look at this holistically, in order to get more insight, but I hope those quick tidbits are food for thought!