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Student Loan Payoff
Question: I earn 60 K but I can live on 45K. I owe 75K in student loans. should I focus on paying those down, invest the maximum in my 401k of 15000 or buy a home? Taxes are killing me.
Answer: I'd probably recommend doing a student loan consolidation, to get a low interest rate and a low payment... and then max out your 401k if your employer matches. But,it's not an easy answer on student loan payoff.
Several factors must be considered when deciding which of the options you mention will make the best use of your money. Basically, you need to look at how much the interest on your student loans is costing you, then weigh how much you feel you can earn by either investing in your 401(k) or buying a home. If the amount earned on one of the two investments is more than the interest you are paying on the student loans each year, you should go with the better investment choice. If the interest on your student loans outweighs what you are earning on the investment, then you should probably focus of repaying those loans.
For the student loans, you need to look at the interest rates and payments to calculate how much interest you will pay in a given year. Plug in the remaining balance on your each of your student loans, the interest rate, and the monthly payment amount. Check the “show amortization schedule” box, hit calculate, and the calculator will show you the cumulative interest you will pay on the loan. You can then play around with different monthly payment amounts to see how much paying extra each month will reduce the interest paid on the loan. For example, on a $10,000 loan at 8%, if you pay $300 per month, it will take 38 months to repay the loan at a cost of $1350 in interest. However, if you double your payment to $600, it would only take 18 months to pay off the loan and the interest
would only be $645. By analyzing different payment amounts, you can see how increasing your monthly payments will affect the amount of interest you will pay on the loan, and if the savings outweigh the potential earnings you could make by investing in your 401(k) or by purchasing a home. For more information about student loans, I encourage you to visit the Bills.com Student Loan Information page at http://www.bills.com/student-loans/
As for the 401(k), you need to carefully analyze how much additional 401(k) contributions will earn you and compare that to how much money you could save in interest by applying the same money to pay down your student loans. The key consideration when deciding if you should invest more money in the 401(k) is whether or not your employer matches a portion of your 401(k) contribution. If your employer matches, you should probably take advantage of the program; not doing so would essentially be passing on free money. Most matching programs have a cap on the maximum contribution they will match. You may want to contribute the maximum amount that your employer will match, then use your remaining funds to make larger payments on your student loans.
Purchasing a home may not be the wisest financial choice at this time. Home prices have been dropping steadily in many markets in the US, and no one really knows where the market will bottom out. You could purchase
a home now, only to see your investment drop significantly in value over the course of the next few years. I must defer advice on purchasing a home to a professional financial advisor in your area, who can better advise you of the housing trends in your area and let you know whether or not purchasing a home is a wise investment. In Northern California, where I live, I would rather spend my money paying down debts and investing in my 401(k) than on buying a home under the current conditions. However, if you are interested in purchasing a home, Bills.com may be able to help; I encourage you to visit our Home Purchase Resources page at http://www.bills.com/home-purchase/
Given the information you have provided, I think a split between paying down your student loans and investing in the 401(k) would be the wisest choice, but keep in mind that this advice is based on very limited information and understanding of your personal financial circumstances. Before you make any plans as to the best way to use your money, I encourage you to sit down with a professional financial advisor who can carefully review your financial situation and tell you the most productive way to utilize your money. Whichever path you choose, I wish you the best of luck. I hope that the information I have provided will help you Find. Learn. Save.
Best,
Bill
www.bills.com
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1. Posted by chad on Tuesday 18th December 2007 07:08
I currently have $18,000 is school loans and have been out of school for 10 years now. (orig. loan amount was $35,000) Unfortunately, I consolidated my loans 9 years ago at 7% and once you consolidate them, you can not consolidate again. I pay as much as I can per month, which is usually $275 per month. At the same time, I have a 401k through work in which I have $17,000. I know that cashing out a 401k has a penalty, but I've also read where you can cash a 401k to pay for school penalty-free. My question is, can I cash a 401k to pay for school that I've already taken so I can pay off my school loans or is that only if I were to enroll and go back to school? Thanks for your help!
2. Posted by Nathan on Tuesday 18th December 2007 12:16
Cashing out a 401k plan before retirement carries stiff penalties. It is always better to take out a loan on your plan. The penalty could be as much as 10% of the amount and this is over and above the income tax that will be charged as well. The only way to cash out without a penalty is if you qualify for a hardship based withdrawal. You should speak to your plan administrator to see if borrowing for school qualifies as a hardship for premature withdrawal of your 401k.