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When should I start putting money into my 401k instead of paying off student loans?

My employer offers a standard match of 50% of up to 6% of contributions, but I have almost $100,000 in student loans at a roughly 7% interest. I make a decent salary (~$65,000) and my initial reaction is to pay off my debt as quickly as possible. But is this the wrong way to think?

Apr 02, 2012 by Reuben from Tacoma, WA in  |  Flag
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19 votes

Hi Rueben ...This is a difficult question. However, if at all possible take advantage of the employer match. Although the loan interest is 7% the match equates to a 50% return on your money. I would suggest developing a budget with the 401k and the loan repayment. Once the budget is developed the hard part begins, remaining discplined. Further, any future pays raises should go toward paying off the loan. Seek a professional adviser if possible to help.

Comment   |  Flag   |  Apr 02, 2012 from Green Bay, WI

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You definitely want to create a budget and see if you can add the "pay myself first" expense to the top of the list. What better way to do this than by having an employer who will give you 3% for your 6% contribution! I would also consider reviewing credit card offers that might come your way that promote at least a 12 month 0% option for balance transfers or purchases and see if your student loan will allow a pay off by credit card. If you do not have the entire balance paid off in 12 months before the 0% offer expires, you can do another balance transfer to a new card as a last resort. Typically you will see in the 3% range for balance transfers so within a two year period if you rolled unpaid balance from 1st card into card #2, you could potentially be paying 3% on any unpaid balance transfer into the second card. Be sure to read the fine print on card offers and request large enough credit line to cover more than unpaid balance.

Comment   |  Flag   |  Apr 02, 2012 from Overland Park, KS

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Another thing to add to your list is an emergency fund. Most advisors will suggest at least 6 months worth of expenses to be set aside in a cash equivalent account. A recent article that I read, suggested even having an entire year set aside. Job security is not what it used to be and you want to be prepared for those downturns in your income.

As Tony mentioned, a budget will be very important to you as you get started. Even writing down every dollar spent during the month (coffee, soda, etc.) it all adds up.

Good luck, and congrats on getting started at an early age.

Comment   |  Flag   |  Apr 02, 2012 from Lititz, PA

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