I have ~$70k across 401k and Roth IRA. I have federal student loan at $17k with 3.8%. Thus, my NW is $53k.

If I choose to invest $19k into my 401k and assume the average rate of return of 7%, my 401k grows to $95k. My student loan goes up to $17.6k with the 3.8% interest. That puts my NW at $77.4k.

If I choose to pay off my loan in one year, my 401k grows to $75k and that becomes my NW.

401k is better for my NW, but I still have the burden of the loan. What would make investing into my 401k the better option other than NW?

  • Life is full of risk, don't bet on uncertain gain. This is not risk aversion, because not everyone has a father called Fred Trump. – mootmoot Aug 20 '19 at 8:23
  • Based on your question it seems that the student loan payment is optional/ Is that a true assumption? – mhoran_psprep Aug 20 '19 at 9:59
  • How much of your loan can you afford to pay if you max out the 401k? (What's the total you can afford per year: 401k contributions plus student loan payments?) – TTT Aug 20 '19 at 14:58

What would make investing into my 401k the better option other than NW?

Company match. Eliminating all 401(k) contribs means no company match, and that's a pay cut, which naturally is Unwise.

More important is the foolishly binary thinking embedded in your statement:

If I choose to invest $19k into my 401k

Who mandates that you must fully contribute into your 401(k)?

Contributing -- for example -- $8500 to your 401(k) and $8500 against your student loans kills two birds with 17,000 stones instead of one bird. Especially with the company match.

And your SL debt is gone in just two years.


If I choose to invest $19k into my 401k and assume the average rate of return of 7%,

And here we go. Assuming a company match for the 19000 your first year investment is an average of 107% (!). Beat that. See, your 19000 get matched with ANOTHER 19000 by the company and THEN you make 7% (also on the match? not sure). Also there is this thing about pre and post deductions ;) Anyone can go in here? is a 401k pre-tax pre-deductions? Not american here.

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    The match generally is not a 100% match. Usually it has a limit of g% of salary, but the rules depend on the company. Also 401(k) comes in two flavors: traditional pre-tax, and Roth post-tax. – mhoran_psprep Aug 20 '19 at 10:02
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    "Generally" is understating it. I would love to see a counterexample to "The match is never (or even rarely) 100%." – chepner Aug 20 '19 at 13:30
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    @DStanley OK, I guess I should have been more explicit and said "100% of all contributions". (I don't recall at the moment if my own match is 50% or 100% of some cap.) – chepner Aug 20 '19 at 13:37
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    @DStanley Yours, yes. The OP is implying you can get a full match on $19,000. (Which is technically possible, if you make in the neighborhood of $200-$300k, but people with those salaries generally aren't trying to optimize the repayment of $17k in student loans.) – chepner Aug 20 '19 at 13:46
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    We can only work with the numbers people give, regardless how much sense they make ;) – TomTom Aug 20 '19 at 13:48

Yes, mathematically, on average investing in equities in your 401(k) will put you ahead, but unless you can get a full match on the 19% (which is very rare), then the gain isn't life-changing (maybe an extra $5-10k depending on the amount and limit of the match). Plus, if you're young, you still have plenty of time to make up for the lost match, and with no student loan burden, you can invest even more in the future!

The main differentiator is risk. You and I both admit that on average equities return more, but the range is massive. in any given year, equities can return anywhere from -30% in crashes to +40% (which is usually a recovery from a crash). We've seen relatively stable growth for the last several years, which might continue, or might not. If you are comfortable with that type of risk and aren't adding any more debt, then you will probably be OK letting the loans drag out a little bit.

I'm usually in the minority on these questions, but I've experienced firsthand the liberation of getting rid of debt (especially student loan debt) even before 401(k) matches. Yes, that match is hard to leave on the table, but having that debt gone opens up many more options for investment. Plus you're only losing the match for one year. I'll take that versus dragging out student loans for several years.

All that to say that there's no bad answer here. Either option sets you up for financial security in the future, so do whichever gives you more satisfaction/peace/stability now.

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