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Gazpacho
07-08-2011, 04:32 AM
In order to pay for my undergraduate and graduate education, I took out almost $100,000 in student loans. All the loans were federal Stafford loans, about 60% unsubsidized (interest accrues during school) and 40% subsidized (interest does not accrue during school).

The interest rate is fixed at 6.8%, and the standard repayment period is 10 years.

My salary covers my regular expenses as well as the standard student loan repayment. Assuming I don't lose my job and my regular expenses stay steady, I have a little money left over.

Is it better to use this money to pay off the student loan debt, or should I put it in a retirement account? My employer will only match up to $1500 per year for retirement, and only if you've worked there five years, so that's not a deciding factor.

My financial situation is otherwise healthy. This is the only debt I have, no credit card debt. During school, I contributed to a Roth IRA using money from the student loans in order to take advantage of my low tax bracket as a student. That account now has about $20,000, so I have an emergency stash.

Debbie S
07-08-2011, 04:55 AM
I guess the economic consideration is the rate of return your retirement fund would get over the rest of the period you would pay back your loan. If you'll earn less than 6.8%, then it makes sense to pay down your debt. If you'll earn more, then choose the retirement fund option. But long-term rate of return is hard to predict (how many years left do you have on repaying your loans?) and remember that your assets, assuming a steady rate of return, do accumulate over time. The earlier you start saving and the more you put in, theoretically, you'll have much more at retirement than someone who didn't.

You might be better stashing the extra money in some short-term investment that you could easily get to in an emergency (job loss, medical event). You don't want to tap into your Roth IRA except as a last resort.

MacMadame
07-08-2011, 06:53 AM
Personally I think you have a legal and moral obligation to pay off your student loans.

bek
07-08-2011, 07:02 AM
Personally I think you have a legal and moral obligation to pay off your student loans.

The person is still making student loan payments. She/he is just wondering if they should pay extra on their student loans, or save some of it.

I actually think maybe half/half???

MacMadame
07-08-2011, 07:04 AM
Oh, nevermind then. I read the message a couple of times and didn't catch that so clearly I have stupid head today. :lol:

Aceon6
07-08-2011, 01:08 PM
My brother is an investment advisor/broker. Saving even a little will have big dividends at retirement. Even at today's volatile rates of return, you can expect to increase your retirement account by at least a third in 20 years. So, if you can afford $1,000 a year for the next 20 years ($20,000 in), you'll have $30,000 at the end. In short, yes it's worth it if you can afford it.

As for the emergency stash, you can use the Roth without penalty only in certain situations. To protect against the unexpected, try to have 3-6 months of living expenses, including student loan repayment amounts, in a regular account. Personally, I'd fund that first. Once that stash is built up, I'd do retirement savings with any extra money, or split between retirement and additional loan repayments.

FunnyBut
07-08-2011, 05:51 PM
I think you should put in at least as much into retirement to get the $1500 company match (if you aren't doing so already). Whatever the match % is, I'm sure you'll be doing much better than 6.8% on that money.

Beyond that, I would consider putting some additional into student loan repayment. 6.8% seems a somewhat high rate to me, not something I think you have a can guarentee you'll outperform with other investments. Also , student loans can't be discharged under most any circumstances, so I think it'd be good to get that debt smaller sooner.

Congrats to you for graduating, having solid savings, being to cover yourself and loans, and still have money left over. I understand that's not easy for most recent grads to do nowadays.

HisWeirness
07-08-2011, 05:56 PM
I agree with Aceon6 to put some of the extra money into your Roth IRA and some into an emergency fund. How you do the split is up to you.

I believe you can withdraw the funds you put into a Roth IRA without penalty, just not any appreciated value.

I'd normally say to first do your 401k match at work, but if you think you will not work there long enough to be fully vested, you can just stick to the Roth IRA.

manhn
07-08-2011, 06:50 PM
Is the interest on your student loans tax deductible? If so, save for retirement.

peibeck
07-08-2011, 07:09 PM
Is the interest on your student loans tax deductible? If so, save for retirement.

It is deductible up to $2500.

Cheylana
07-08-2011, 07:09 PM
Are you looking to buy a house in the near future? Worth thinking about whether you want to have some cash on hand for a downpayment and how current mortgage interest rates compare to your student loan interest rate.

The "smart money" thing to do is probably to save for retirement, but I paid off my low-interest student loans a few years ago anyway. It was largely for psychological reasons. They were enormous ($185,000 at one point) and I was anxious to be debt-free. It's not like a mortgage where you have an asset (house) on the opposite side of the balance sheet, and I was afraid that if I were to lose my job I would be stuck with all this debt and no way to pay it.

PDilemma
07-08-2011, 07:24 PM
Are you getting more interest on retirement than you're paying on student loans? That's an issue to consider.

I'm using retirement funds to pay for grad school right now as the interest the IRA gains is way less than what I would pay on student loans. My intention is to pay my IRA back when I am employed full time again in the same way I would pay back a loan.

My husband is also investing through a company plan which we will be able to put more in when I am fully employed again.

Cheylana
07-08-2011, 07:52 PM
Deductibility of student loan interest depends in part on your annual gross income -- there's a cutoff somewhere around $80,000, I think, though I haven't looked at that in a while. I wasn't able to deduct a penny once I started work as a NY attorney.

Gazpacho
07-09-2011, 12:34 AM
Thanks for all your answers!


Beyond that, I would consider putting some additional into student loan repayment. 6.8% seems a somewhat high rate to me, not something I think you have a can guarentee you'll outperform with other investments. Also , student loans can't be discharged under most any circumstances, so I think it'd be good to get that debt smaller sooner.6.8% is the fixed rate on federal student loans, which is lower than private student loans. Interest rates are really low these days, so it's higher than a mortgage rate, but if interest rises, then it's a good deal.

Federal student loans are also discharged upon death or permanent disability, unlike private loans. So if I die before the payment is up, my survivors aren't held liable. I don't know how much that fact should play into my decision though.


I believe you can withdraw the funds you put into a Roth IRA without penalty, just not any appreciated value. That's my understanding too.


Is the interest on your student loans tax deductible? If so, save for retirement.Yes, it's tax deductible up to $2500 if you're under a certain income. On the other hand, retirement funds are also not taxed other than the Roth IRA which is taxed now but not when you withdraw from it.


Are you looking to buy a house in the near future? Worth thinking about whether you want to have some cash on hand for a downpayment and how current mortgage interest rates compare to your student loan interest rate.I don't know if/when I'll buy a house. The Roth lets you withdraw money for a house down payment, but then I'd be dipping into what's supposed to be an emergency stash.


The "smart money" thing to do is probably to save for retirement, but I paid off my low-interest student loans a few years ago anyway. It was largely for psychological reasons. They were enormous ($185,000 at one point) and I was anxious to be debt-free. It's not like a mortgage where you have an asset (house) on the opposite side of the balance sheet, and I was afraid that if I were to lose my job I would be stuck with all this debt and no way to pay it.That's a good point that I hadn't considered. I do worry about affording my student loan payments, but I think federal student loans let you defer payment if you lose your job. It lessens the temporary load, but you'll pay more in the long run, of course.


Are you getting more interest on retirement than you're paying on student loans? That's an issue to consider.That's what's making the decision tough. Now the interest greater on the student loans, but what if the stock market does well, and the retirement fund earns greater return than the student loans in the long run? It's all uncertain.

Aceon6
07-09-2011, 12:38 AM
Gaz, sounds like there are pros and cons either way and it might make sense to put 1/2 of the extra into the loans and the other 1/2 into your savings. You can always change the allocation if your circumstances change.

One other thing that my brother recommends is putting any "found money" into the retirement account. Gifts, bonuses, etc. It's a way to keep adding without seeing an impact on your monthly budget.