I'm 25 with $40k in loans and everyone gives me different advice. The math says invest but the psychological burden of debt is killing me.
I've been going back and forth on this for months and it's honestly keeping me up at night. My student loans are at 6% interest and I could probably pay them off aggressively in 3-4 years if I throw everything at them. But everyone keeps telling me I should be investing in my 401k instead since I'm young and compound interest is powerful. From a pure numbers perspective I get it. If I can average 7-8% returns in the market and then mathematically I come out ahead by investing and making minimum loan payments. My company even matches 50% up to 6% so I'd be leaving free money on the table. But the psychological weight of having $40k hanging over my head is brutal. Every month I make that loan payment I feel like I'm treading water instead of getting ahead. The idea of being debt free feels so appealing that I'm tempted to just attack the loans with everything I have. My dad says pay off debt first because "guaranteed 6% return beats theoretical market gains" My financially savvy friends say I'm being emotional and should focus on building wealth while young. My coworker split the difference and does both but that feels like I'm not making real progress on either front.
I make about $65k and can afford to put maybe $800-1000 extra toward either loans or investing each month. What would you do in my situation?
Should I prioritize paying off my student loans at 6% interest or start investing in my 401k?
byu/Shot-Conversation538 inpersonalfinance
Posted by Shot-Conversation538
23 Comments
Your student loan debt is not at a super high interest rate, and I think you would be better off to take advantage of the compounding and the company match that comes with investing in your 401(k).
If it’s me, I would invest enough in the 401(k) to get the full match and contribute the rest to the debt. And once the debt is gone, reevaluate and put more towards investing.
Take at least the match. 50% return guaranteed!
Match first, loans second. Finance is about balancing current day and future day self. Paying off a 6% loan benefits both versions of you. A guaranteed 6% annual roi should not be a taken lightly.
Find a balance, it’s not just one or the other. You’re going to have debt during your life and retirement savings is a long play where time value of money is key.
If the debt is going to bother you, focus on the loans. It is a guaranteed savings long term, but the mental weight over years can be grueling. You can’t “not pay them” so the other option would be splitting which would be ideal.
In an emergency you can always liquidate some assets youve invested in, but also if you have no debt/less monthly payments times of emergency are not as bad as they could be.
Also if all the loans are not 6%, focus on the ones that are, I have a loan at 3% im always making min payments on & one at 6% im making more on.
As a 39 year old who is still paying on student loans, I would tell you to pay off your loans ASAP. Then you’ll be able to invest more into retirement and it also gives you more financial freedom. You’re still so young. Get it paid off and you’ll be glad you did.
Max out your employer matching, then put the rest towards student loans. 6% guaranteed return on your money is fantastic return.
Important note to remember is student loan rate is paying post tax dollars. So it’s more equivalent to 8-9% pretax returns.
Rule of thumbs are:
* Anything below 5%: don’t pay extra
*Anything over 10%: prioritize debt repayment
* In between: prioritize debt repayment but not at the expense of retirement savings (save at least 15% of your income for retirement)
Make sure you follow the flowchart order of operations:
1. Contribute to your company 401k plan up to the match
2. Max out your health savings account (HSA) if applicable (must be on a qualifying high deductible health insurance plan to qualify)
3. Max out your individual retirement account (IRA)
4. Max out your company 401k
5. Contribute to a taxable brokerage account
Make sure you invest in broad market low cost index funds: https://www.bogleheads.org/wiki/Three-fund_portfolio
Invest with a reputable low cost brokerage firm like Fidelity, Schwab, or Vanguard
401K all the way. You get a match and tax deduction and long term returns likely higher than 6%. Plus you get a tax deduction on student loan interest. Math heavily favors 401k
If you get a 401k match, I think the advice is to invest to get that match and then pay off high interest debt. 6% isn’t that high, but my personal guideline is that I’m paying down anything over 4% because that’s my savings account return and some of the worst market returns, and I fear we may be headed into a period where we get relatively mediocre market returns for a while.
I personally made a spreadsheet to cover whether or not I wanted to invest money vs pay off student loans and came out with the split approach myself, leaning on the side of paying a bit more towards loans. The problem being that while you can get 8% returns, you’re not really gaining a lot of ground due to the loans’ high balance actually sucking a fair bit from your gains.
For debt interest rates under 8%, you should save at least 15% for retirement before considering paying it off. The tax advantage of retirement accounts is more valuable.
Bare minimum, absolutely put enough in your 401k to get that full match.
From there, personally, I’d stock up my brokerage until I had a good cushion, then I’d hit the loans.
Invest in your 401k to get the company match and pay off the student loan as quickly as possible.
To make money investing, you have to accept some risk. With the student loans out of the way, you will be in a better mental place to invest, and you will have more of your income available to do it.
Come up with a plan to pay off the $40K fast. Just in my head I could see paying it down at $1000/mo would take about 4 years. $2000/mo would eliminate it in less than two years. If you get an income tax return, overtime pay, bonus, raise, etc use it to help pay the debt faster. Once the debt is gone, the frugality and discipline you will have learned will help you to put aside funds for investing.
Good luck
I’d at the very least take full advantage of the company match, if there is one. I’d also cut my expenses to the bone, and pay off that loan asap.
Consider roommate living, moving home, whatever it takes to pay off that loan ASAP.
It’s a 50/50 situation to me, I personally would pay the minimum and invest the rest (invest until it hurts), but it brings me greater happiness to see my retirement accounts grow vs my debts decrease. If the opposite is true for you, I would still invest up until match and then pay the debt as much until it hurts
You should max a Roth IRA and hit your 401k match before paying extra on your loans; otherwise you are just harming yourself.
Invest in your 401k enough to get the match, put it in an Index 500 fund. Stop going out to eat or other unnecessary activities and put everything remaining into your Student Loans. This will only hurt for a short time. Look for a way to make extra money like an easy part time job. There isn’t a better feeling of being out of debt and have wealth growing for your future.
At 25 you should be investing (in tax advantaged) over paying a 6% debt. That’s probably true all the way to ~40 years old, although opinions differ. The point is your debt payoff cutoff is a function of your age (really, time until expected retirement date), something like cutoff=7.5%-1%*(age-20)/10.
If it is making you miserable, though, it isn’t awful to go ahead and pay it off.
“Split the difference” comments don’t really make sense. Just a way to cop out of having to commit to an answer.
I’m in almost the exact same situation as you in age, income, and debt, except my debt is split between a car and student loans. When I first started this job I had a ton of back and forth on what to do.
The way I’m approaching it is to contribute up to the match in my company’s 401k, and then throw absolutely every extra dollar at debt. My car is about 6%, and my loans average 5%.
I’m living with my cousin and only pay about $500 in rent, which is something else you need to consider. Do you live at home, or do you rent an apartment? What wiggle room do you have, and if you do have any wiggle room (living with parents/family), I’d suggest aggressively prioritizing the debt after the 401k match.
If you rent your own apartment or live with roommates, definitely build up an emergency fund if you don’t have one already, *then* hit the debt. If something happens with the job and you’ve thrown all your extra money at debt, then there’s a chance you’ll have to live off of credit cards for a bit depending on your situation and that’s not a risk worth taking.
Regardless, I understand the hesitancy of prioritizing debt and then “missing out” on significant gains in the market. Think of it this way though, once that debt is paid off in 3-4 years, you can throw all that money into investing and not have to worry about missing out or having your debt interest affecting of your investment growth.
Pay off the debt first and do so aggressively. Then throw that money at your tax-advantaged retirement funds.
I’m in almost the exact same situation as you. I’m still in school, so the payments are deferred, but I pay off any interest every year. You can write that interest off your taxes for an extra gain, that way you get the guaranteed 6%, and lower your taxes burden
if the debt bothers you, pay it off. money isn’t everything
Employer match should be one of the first things you allocate money towards, before all debt https://moneyguy.com/guide/foo/