I am 30 years old and make about $2400/mo take-home. I was paying two student loans, one was $250/mo and the other is $410/mo. I paid off the $250/mo loan, and I have to decide if I should put the extra $250/mo toward the other student loan, or put it into my company's 401k account.

The loan principal is about $56,000 and is set to be paid off in 14 years with an escalating monthly payment increasing up to $550/mo.

What would the rate of return need to be for the 401k to make it more desirable, and how would I calculate that? Also, my company matches up to $150 for the 401k.

  • 6
    $150 per what: month, year, paycheck? Jan 23 '16 at 1:30
  • 1
    What is the interest rate on your student loan? It's hard to calculate because you have an escalating monthly payment, but I would guess about 7%? Jan 23 '16 at 19:06

From the details you've given, I've calculated (via interest rate calculators you can find from searching the 'net) that your student loan rate is somewhere between 3% and 7.9%. (Principle=$56k, 14 yrs of payments, payment is between $410 and $550). But you'd be better to talk to your loan provider and find out the proper details on interest rate and loan structure from them as I'm just assuming 168 monthly payments on simple loan interest to arrive at those figures -- you don't give enough detail to do otherwise I think.

If your company matches $150 per month of your possible $250 contribution that is an instant 60% return. So, strictly by the pennies, you'd be much better off contributing to your 401k.

However, you should probably consider that most student loan debt is not forgiven if you ever declare bankruptcy -- it depends on the type of loan you have. As such, if I didn't have a way to continue to pay it for a long while should I lose my income in part or whole, that would be a priority for me to pay off just so I'm not at risk of facing consequences besides bankruptcy.

That said, it's pretty hard to give up that 60% immediate return on matching to your 401k. Perhaps you should consider splitting your extra $250/mo to get the max matching possible (is it the full $150 at $250 contribution or can it be lowered? i.e. is it 1-to-1 match capped at $150?) and then send any extra to paying down the 2nd student loan.

  • OP wasn't so clear on the nature of that match. "Up to $150" doesn't make sense without further explanation. Jan 24 '16 at 13:48
  • Sure, it wasn't strictly specified but I read it as $150 per month if he contributes $250 per month. I think this is most likely as $150 per year seems way lower than any company I've ever heard of, and all his other numbers aren't per paycheck. Anyway, since the question has already been asked in comments, but as yet unanswered, I think it makes sense to go with the obvious and then edit my answer, if necessary, once the OP clarifies.
    – davmp
    Jan 24 '16 at 15:11

You're leaving risk out of your equation (among a few other points of info noted by others). While the match is unbelievably hard to give up, financial expert Dave Ramsey says to build a starter emergency fund of $1000, pay off the loans (and all non-mortgage debts), build the rest of your emergency fund to 3 to 6 months of expenses and then start investing. https://www.daveramsey.com/baby-steps

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