Student Loans/Investing

[dynamitecat01]

Hi Everyone,

I'm looking for some advice with paying off my student loans and managing my finances.

I have 60K in student loans at 6.8% interest and no other debts.

I currently earn about 4,000/month and have 5k in savings. I'm contributing to my 401k up to the 3% that my employer matches..

My question is, should I try to pay off my student loans as fast as possible or do the customary 10 year plan and put any remaining in investments?

My rent is around $1,000 a month
Other expenses normally come out to 500 or so, which leaves me with 2,000-2500 to either put towards my loans or to invest. From what I have researched, it sounds like a ROTH IRA would be a good idea as well as mutual index funds. Should I be putting money towards this or just put any funds towards my student loans? Also if I do put $ towards a ROTH or index fund, would I do that through my employer's 401k company also?

The con of putting off my student loans is the accumulating interest, but I know that there are tax benefits to paying on your student loans and possible potential to earn more than the 6.8% with other investments, but am really unsure of how to approach this. I'm usually very good at managing my finances, but I feel very overwhelmed with my massive amount of student loans and it's been weighing heavily on me lately. Please share any advice/insight. Thank you!

[dczech09]

I am assuming you are in your 20s?

I had to make the same decision as you at one point. What I decided is that I did not want to pay off my student loans at the sacrifice of my retirment savings. At my age (24), I am in a very advantageous position to REALLY create a huge retirement nest egg. While I could pay off my student loans by the end of this year, I have decided to max out my Roth IRA instead. You are probably in a similar position.

Ultimately your best friend when saving for retirement is one word- time. Time will allow the nestegg to grow, especially in the later years.

Your income is $48,000 per year. Your student loan payments (minimum) are probably about 10% of take home pay. I would put about 10% to 15% of income into retirement if I were you. Keep your match of 3% in the 401k, and then max out your Roth IRA ($5,000 per year).

You would not necessarily have to go through your 401k company for the Roth IRA. I would look at T Rowe Price as they have a good program. There are plenty of providers out there.

Once you have put 10% to 15% of your income into retirement savings, then you should make sure you are setting money aside for maintenance of your car, apartment/house, and other things that may be coming up. Also make sure you maintain AT LEAST $1,000 for emergencies (I say more).

And make sure you live on a balanced budget. If you want to make sure your student loans do not drag you down, simply live on a balanced budget. This will help you prevent new debt, and stay on top of your current debt. I would not worry about the interest too much. With $60,000 in loans, you will be paying on them for a while, so you might as well focus on retirement too. This way you have a good thing going when you do eventually pay off the loans.

If you do all of this, you should be rocking!

[Slug]

Normally, I would have something to add here, but I'll just completely agree.

401k to the match
Roth maxed every year
Build emergency fund to 6 mths of spending (or to wherever you "feel" safe)
Pay down loans.

[dynamitecat01]

Thanks so much for the responses! I'm so glad to have found this website. I've researched online quite a bit but nothing seemed to describe my specific situation. Yes, I'm in my 20's (26).

So, if I match my 401k and max out the ROTH IRA at 5K/year and then keep 5k in savings for spending/emergency fund, if I have any money left over, would you suggest I put this into something like a mutual index fund or just put the extra money towards my student loans?

[dczech09]

Put the extra on your loans. I would definitely try to pay them off as soon as possible, just not at the sacrifice of saving for retirement.

[skydivingchic]

I wanted to point out that index funds are just a type of fund and they can be held in any type of brokerage account, including your Roth IRA. Some reputable and popular companies for a Roth IRA are Vanguard, T Rowe Price, and Fidelity. All offer low cost, no load mutual funds (including index funds). Pick one that suits your needs. The "Roth IRA" part just describes the type of account and the tax treatment. At some point in the future you could also open a taxable brokerage account and invest additional funds in index funds.

[jpg7n16]

I'd 1) up my 401k to the company match. (No more, no less)
2) Then build up to $10-15k in EF cash.
3) Then pay off any SL's charging over 6% (Reconsider when you have less than $36k loans to go)
4) Then start in on maxing the Roth.
5) Then up total retirement to 15-20% across all sources (not including the company match)


I know SLs are tax deductible, separate from itemized deductions, but only up to $2500 of interest. (Tax Topics - Topic 456 Student Loan Interest Deduction)

$60k @ 6.8% = $4,010/year interest. Meaning you don't get to deduct all of it, meaning you could save 6.8%/year by paying it down.


I would rather save 7% risk free, than take risk and try for 7-11%. Personal preference, and I'd consider myself very comfortable with risk.

[LMA]

Originally Posted by dynamitecat01

, but I feel very overwhelmed with my massive amount of student loans and it's been weighing heavily on me lately.

That right there is all you need to decide which way to go

It weights heavily on you because you are $60k in DEBT at 7%! Therefore your first priority should be to get rid of your debt. If you put $2,000/month on your loans you will get rid of them in 2.5 years and even less time if you come across some other money that you can put towards paying them off.

Then...you put that $2,000/month towards your Roth and 401k and you will have a million dollars much sooner than you expect and you will be debt free.

[dynamitecat01]

Thank you very much for the replies and advice/info!