I am a recent college graduate with student loans and a job which puts me at the top of the 15% tax bracket. I'm not sure how my career will grow at this point, but I was thinking it's possible I'll stay in the 15% bracket my whole life, especially if I get married.

I've done some research and decided to repay some of my student loans ( at least the 7.9% and 6.55% ones ) before investing past my company 401k match.

Here's the situation I'm wondering about: Say my forecasted taxable income (line 43) is $37,900 for the year, and I plan on paying $3K additional to student loans. $1K of that is in the 25% tax bracket, so I'd pay an addition $100 in taxes on it. Or I could have put the $1k into my 401K, withdrawn it in retirement at 15%, and only paid $2K on the loan.

I tried some online calculators which suggested that the additional loan payment would far outweigh the tax cost. Is this always the case? Is there any combination of interest rate, loan balance, and additional payment amount that would make it a bad idea?

The simplest example I could think of is a loan at 0%, it wouldn't be worth paying more in taxes to pay it off early since it doesn't cost you anything. Since it works at 0, I figure it would also work at 0.1% .... but probably not at 25%. I'm just not sure how to math it out.

  • 1
    I'm not sure I understand - what's the relation between repaying your loan and 401k? How are they mutually exclusive?
    – littleadv
    Jul 6, 2014 at 19:58
  • @littleadv they're not, and some of my money is going to each. However for money that would put me into the 25% bracket I can either put it to loans, or the 401k & avoid the 25%. I'm wondering if it always makes sense to pay off the loan at the cost of a higher tax rate.
    – VBCPP
    Jul 6, 2014 at 20:24

2 Answers 2


I think I understand your issue, but believe you are looking at it from the wrong angle.

Say you have debt at 6%. Assuming you itemize or it's a deduction you can take regardless, while in the 25% bracket, the debt costs you 4.5%, in the 15% bracket, it costs you 5.1% net.

The difference is too small to impact whether you pay it off sooner. To be clear, some prefer to focus on 5% debt as a priority to retirement savings, others will place it second. But I don't see that the difference from 4.5 to 5.1 is substantial.

I do think you should consider whether the retirement account is pretax (traditional IRA / 401) vs the Roth flavors. I'd lean toward Roth while in the 15% bracket and pretax when in 25%.

  • I guess I'll accept the "too small to matter" since that's what I was assuming in the first place. I do plan on only using pretax to make sure I'm in 15%, then go with roth options
    – VBCPP
    Jul 10, 2014 at 23:45

What you are concerned about is optimization. You are concerned with, I assume, the most economical allocation of your earnings over your career to maximize your earnings.

The general equation first divides your income, expenses, debt, and debt payments into taxable and non-taxable categories. This will provide your the percentage change in your net worth from your current age x to the age of y.

Return@ageY = sumx>y((Taxable Income - Deductible Expenses)X(1-Tax)) + sumx>y(savings X (1+return))-sumx>y(non-deductible expenses)-sumx>y(non-deductible debt(ndd)X (1+rate))+sumx>y(payments ndd X (1+rate)) + (current assets * inflationx>y) / current assets

  • It is an optimization question, or perhaps micro-optimization in this instance. Not sure how to apply that formula though
    – VBCPP
    Jul 10, 2014 at 23:29

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