I’ve been debating whether or not to pay off my college loans or try to save as much money as possible. My loans total $58,000 and range from 3 to 4.75%. I have additional savings and investments, a great emergency fund, and 12% of each cheque that goes into a Roth 401(k). Should I invest for my five-year goals now and pay those off as quickly as possible, while also reducing my retirement contributions?
If your investments are significantly outperforming 3-4.75% with no other factors considered, investing makes more sense. However, consider that having more flexibility with your balance might be useful if you need to make financial adjustments later. At your age, investing even a small amount now can have a substantial impact compared to waiting five years and investing a larger sum.
When I had student loans, I paid the minimum evenly. Whenever I received a raise, I divided it in half: one quarter went to investments, another quarter to the highest-interest student loan, and the remaining half improved my lifestyle. Bonuses or gifts went directly into investments or debt repayment.
To accelerate debt repayment without extra spending, I reduced my Roth IRA contributions by 3-4% and redirected the tax savings to my debt. Though it was only a few hundred dollars annually, it made a measurable difference in paying off high-interest loans.
Also, regarding your 401(k), if 12% is more than needed to get the full match, you might consider opening an IRA for the excess contributions. The fees are usually lower, and while the savings might not be huge initially, they will grow over time.
There’s no denying that the return on my investments exceeds the interest I pay on my loans. I own some S&P 500 comparable ETFs as well as QQQ. Since my match is 5%, I’m boosting it by an additional 7%. I debated whether to follow u/AverageJoe-707’s lead and use my Roth to pay off debt by reducing it to 10%. For tax benefits, it would also be wise to shift a portion of your income to traditional methods. Check how much that increases your net pay.
In hindsight, I wouldn’t have reduced my contributions at all. I started contributing a small amount to my 401(k) around age 25, prioritizing extra debt payments, and didn’t start making significant contributions until I was 28 or 29. This aggressive debt repayment saved me less than $10,000 in interest but cost me over $100,000 in potential earnings, based on a pessimistic 7% return rate over those 3-4 years. If I could do it again, I would have focused entirely on traditional contributions and built up the Roth later. Now, in my late 30s, I’m saving 17% and constantly trying to optimize my recurring expenses for small gains, but it’s not making the same impact as it would have even just 5 or 10 years ago.
I simply don’t go traditional 100% because I don’t want a large retirement benefit to be deducted from my income. Considering that I will only be making contributions while I pay down my debt and will return to Roth after I’m done, should I really be concerned about this?
Debt repayment accelerates the amount of money available for investments.
That advice is appalling. Investing often yields far higher returns than taking on debt.