Should You Be Putting More Money Into a 401(k) or Toward Student Loan Debt?

  • In Business
  • 2021-10-22 22:40:02Z
  • By GOBankingRates
clownbusiness / Shutterstock.
clownbusiness / Shutterstock.  

Life is all about making choices, and that's especially true when it comes to making a monthly budget, no matter what your age.

Weigh In: Should We Forgive Student Debt? Take Our Poll
Read: What To Do If You Can't Afford Your Student Loan Payments

In your 20s - and even into your 30s and beyond - that monthly budget could include student loan repayments. After all, 43.2 million Americans owe an average of $39,351 each - a total of $1.73 trillion, according to research organization

And if you find you have some room in your budget to pay more than the minimum payment due on your student loans, your instinct might tell you to accelerate your loans to pay them off faster. But is that the best budgetary choice to make?

Maybe not if it means ignoring your retirement savings. So what should be your priority - attacking your student loan payment or funding your 401(k)? Here are the pros of both.

More Decisions: Where To Put Your Money: Savings or Retirement?

Pros of Accelerating Student Loan Payments

You can speed up your student loan payoff by paying more than the minimum monthly payment, and you'll reap some financial benefits:

  1. Your loan will be paid off sooner than you expected. An early loan payoff means you will be able to increase your emergency fund or start to save for big expenditures, such as a wedding or a house. Or you could then add to your retirement account.

  2. Your credit score will improve as your debt-to-income ratio goes down. That is beneficial if you want to obtain a mortgage, for example.

  3. You could save a significant amount of interest, especially if you have a large outstanding amount or private loans that carry higher interest rates than federally backed loans. Student loan calculators are readily available online and can give you an idea of your savings.

See: 9 Ways Student Debt Is Affecting Every Aspect of Americans' Lives
Get Started: Make a Debt-Free Future Your Reality

Pros of Funding Your 401(k) Account

But what if you want to take that extra money and put it in a 401(k) account through your workplace? Here are some of the benefits:

  1. The earlier you start saving, the more time you have to accrue interest or invest the funds, and you won't have to play catch up later on to make sure your retirement is adequately funded. Fidelity estimates you'll need to save 15% of your annual income if you begin saving at 25, 18% at age 30 and 23% at 35.

  2. You can benefit from matching funds. Your employer might offer to match every dollar you contribute, up to a specified amount, such as 5% of your salary. If you earn $50,000 and put 5% into your 401(k), that's $2,500 your employer will match per year. You can't beat that.

  3. Money is contributed on a pretax basis, meaning you won't pay taxes on that income in your filing year. That will save you money come tax time.

More To Consider

Paying off your student loans and saving for your retirement doesn't have to be an either/or proposition. But it can be made easier by choices you make, including where to work.

A question to ask prospective employers, in addition to whether a 401(k) match is offered, is whether student loan repayment is part of the benefits package.

"The best bet for those starting out in their career is to work for an employer which recognizes and addresses the challenge of saving for retirement while paying back student loan debt by offering assistance with both. A growing number of employers are offering student loan repayment assistance as a financial wellness benefit," said Patricia Roberts, the chief operating officer at Gift of College.

In fact, under the Internal Revenue Code, employers can offer up to $5,250 per employee per year in tax-free student loan repayment through Jan. 1, 2026, Roberts said.

More Help: 30 Ways To Dig Yourself Out of Debt

Final Thoughts

You must make at least your minimum student loan payment each month. If not, your credit score likely will be harmed. Even one payment that is 30 days late will negatively impact your FICO score since payment timeliness represents 35% of the score's calculation. Late payments stay on your credit report for seven years, according to credit bureau Experian.

Keep Reading: 19 Ways To Tackle Your Budget and Manage Your Debt

One factor to remember is that interest rates on federal student loans are relatively low. Over the past five years, undergraduate student loan interest has been 4.11%, said. For current undergrad loans, it's even lower at 2.75%. The money invested in your 401(k) likely could earn more than 4.11% interest. So, if you use extra money in your budget on an extra student loan payment instead of investing it, you actually could lose money.

The decision to pay extra each month toward your student loan balance or put it into a 401(k) or other retirement account is a personal one. There is no one-size-fits-all approach, and your entire financial picture must be taken into account.

A financial advisor can help you to figure out what the right decision is for you and your financial goals.

  • Find Out Who Made GOBankingRates' Best Credit Cards Lists and Get Helpful Tips

  • LATEST POLL: How Do You Plan To Travel Over the Thanksgiving Holiday?

  • How To Use a Credit Card Like a Pro This Holiday Season

  • What To Consider When Choosing a Mortgage Lender

Last updated: Oct. 22, 2021

This article originally appeared on Should You Be Putting More Money Into a 401(k) or Toward Student Loan Debt?


More Related News

Judging by the future, not the past, Stride takes steps to turn student finance upside down
Judging by the future, not the past, Stride takes steps to turn student finance upside down

With a philosophy that the current student loan systems perpetuate the rich-get-richer systems, Stride Funding is taking a different approach and just raised $12 million to help it take the business a few more steps into the future. It is with quixotic optimism that Stride Funding is taking on the $130 billion student loan industry, which currently has $1.6 trillion worth of loans outstanding. Since closing its seed round in 2019, Stride increased the capital committed to students to over $50 million, with capital providers such as Silicon Valley Bank seeking to finance hundreds of millions of additional funds.The main thrust behind the company is to make education more available,...

RBA to start tightening in early 2023: Reuters poll
RBA to start tightening in early 2023: Reuters poll

The Reserve Bank of Australia (RBA) is expected to raise interest rates in early 2023, and possibly sooner, according to a Reuters poll of economists, who...

Wall Street balks as Fed signals party
Wall Street balks as Fed signals party's ending, but is it?

The Federal Reserve's job, its longest-serving chairman once said, is to "take away the punch bowl just as the party gets going," and that's exactly the...

British tennis player Johanna Konta announces retirement
British tennis player Johanna Konta announces retirement

Johnna Konta was a four-time WTA title winner and reached as high as No. 4 in the rankings.

Student loan refinance rates drop to new all-time lows and offer wider savings
Student loan refinance rates drop to new all-time lows and offer wider savings

New data shows refinance loan rates are historically cheap, even deep below 2%.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply


Top News: Business