Hi everyone, first time poster here. I’m essentially looking to switch from Dave Ramsey-ish to Money Guys. Smart move? I have 22k in student loans remaining ranging from 3.4-4.99%, but I’m in grad school (paid for by my parents, incredibly grateful) so they’re deferred until November of 2028. Some are subsidized so are thus accruing 0% interest. Currently contributing 12% to my 401k with a 3% employer contribution, for a total of 15%.
I just feel like I’m leaving money on the table with the compound interest I could gain from increased investments. Altering my strategy would be a huge move and I want to make sure I’m making a sound decision. I would still be able to make student loan payments if I increase my savings to 22% (25% with 3% employer contribution). Do I change my strategy or stay the course?
Thinking of increasing 401k contributions to 25% instead of aggressively paying down student loans
byu/boriquoi inpersonalfinance
Posted by boriquoi
12 Comments
Yes, this is a good decision and some people don’t understand that even after you explain it to them very clearly. I’m glad you found out by yourself, it’s like a breath of fresh air when someone gets it.
Math is on your side here pretty clearly. Your loans are 3.4 to 4.99% and some are subsidized accruing 0% during deferral, and the long run real return on a diversified equity portfolio has been around 7% after inflation. Paying down a 0% loan is literally giving the government free money you didn’t have to give them…. and even the 4.99% bucket is below expected market returns over a 30+ year horizon. The bigger thing most people miss is that 401k contribution limits are use it or lose it every year, you can never go back and contribute to 2026 once 2026 is over. One thing worth considering since you’re in grad school is that your marginal tax rate is probably lower now than it’ll be later in your career, which is the textbook case for Roth 401k contributions instead of traditional if your plan offers it. Pay the minimums on the loans when they come due, max the tax-advantaged space now I’d say
You have the right idea.
Even after the 0% referral ends, there is a tax credit you may be able to take advantage of a student loan interest tax credit.
Do you have a IRA type account? since you are already getting your employer match already, the general next step is to fund your IRA’s (either Roth or Trad depending on income use a low cost index fund like VTI ) and then go back to filling the rest of your 401k after.
But your intuition is mathematically sound.
With inflation sitting at 3.3%, your effective loan rate is near 0.1-1.7% even after deferrals end. I’d set payments to minimum and ride it out the rates are so good.
My graduate loan average is 5.12%. my 6 year rate of return in 401K is 12.26% despite a seemingly tumultuous market. That’s easy math for me looking back. I’m at individual max 401k and thankfully able to overpay the student loan statement by about 20%. I find the Money Guy FOO to be far more realistic and achievable than Ramsey. Ramsey is still living in a economy long gone. He’s made so much money from real estate and his grift that he’s lost touch with modern personal finance.
At 3.4 to 4.99% interest with some of it at 0% while deferred, those student loans are some of the cheapest debt you will ever carry. The math strongly favors putting more into the 401k right now rather than aggressively paying down loans at those rates.
The Money Guy approach makes sense here. Your investments have historically returned well above 5% over long periods. You are essentially borrowing cheap money and putting it to work somewhere it grows faster. That is not a loophole, that is just good math.
The one thing worth confirming before you make the jump to 25% is that you are comfortable with your monthly cash flow after the increase. Run through a full pay period budget and make sure the higher contribution does not leave you scrambling for normal expenses. If the numbers work and you still have breathing room then increase it.
You are already at 15% total which is ahead of where most people your age are sitting. Going to 25% total while your loans are deferred and partially subsidized is a genuinely smart window to take advantage of. Once repayment starts in 2028 you can reassess and dial back if needed but right now you have a rare combination of low interest debt and time on your side.
Trust the math on this one. You are thinking about it the right way.
Yep. 6% is my personal limit where I’d rather pay down debt than invest more.
There’s no way to know if this is the best decision. If the stock market goes up in the next 2 years, then it’s probably the right call. If the stock market is flat, negative, or slightly positive, the you would have done better paying down debt.
You wouldn’t really want to pay down the loans now, but you could put the extra money in a HYSA for the the next two years and make a lump sum payment on the loans before the interest kicks in.
You are making a bet on the stock market vs the guaranteed return of paying down debt. With your loans being at low interest rates, it’s not a terrible bet that the market will beat that rate, but it might not over such a short timeframe.
What does the rest of your savings look like? Do you have a decent emergency fund?
I did this same thing about 4 years ago and my net worth exploded since then. Worth it
Yes, when I was in your shoes I was max investing and minimal student loan paying. It was worth it for me and my family.
I think both are valid strategies for different reasons, and for the average person I would say killing the loans (the unsub at minimum) should be the priority simply because it eliminates variables and debt sources.
That being said, if youre strictly thinking max financial benefit long term then theres no question that upping your contributions is the better move for long term gain. Your explination and willingness to even ask the question proves youre not in that bucket of “average” where I would suggest the safe route just for the sake of being safe.
Dont forget that there is a medium here (if you want it) as well where you could still pay the higher interest or unsub loans and put 20% instead of 25%, for example. But your overall strategy and logic is very sound, regardless of the number you pick