Roth IRA 2007 vs Student Loans

[sstarch3]

Quick question for everyone.
I owe 14k in student loans some are subsizied and some are not. The interest rate is low because it's a goverment loan.

I was considering maxing out my 2007 contributions for my IRA before April. Currently my 2007 IRA is at 0 dollars, since I just started work full-time.

The student loans are defered for 6 months and if I don't contribute to the IRA for 2007 I will have the student loans and my 2008 IRA finished prior to 2009.

So should I max out the 2007 and push the student loans out another 3 months or just pay off the student loans.

*Note I am also sitting with no extra money in savings incase something happens, but I'm currently using half of my income post tax and post health care and savings.

[atomicrc11]

Did you have any income in 2007? If you didn't have any earned income you may only contribute $5000 or the amount of your earned income into your Roth, whichever is less.

[jIM_Ohio]

I'm not completely clear on when debt would be paid off vs amount which is being invested.

IMO you should put money in the IRA for 2007 prior to paying down debt. I assume you are making minimum payments on the debt and not accruing any interest on the debt. If the deferrment is accruing interest, at minimum I would pay the interest towards the loans, then put something into IRA (until maxed) then start paying principal on the loans.

When does the deferment end?
What will student loan payment be?
What is your budget?

[ktmarvels]

Did you have any income in 2007? If you didn't have any earned income you may only contribute $5000 or the amount of your earned income into your Roth, whichever is less.

Actually the 2007 maximum was $4000. It was raised to $5000 for 2008. But it is correct that you can only put into a Roth if you earned income or have a spouse who earned income (Spousal Roth).

[sstarch3]

1. I made over 4k in 2007 so I can contribute fully.
2. I have not paid any interest on the loans, because I have never had the money while in school.
3. Approx 5k of the loan is subsidized meaning it does not cost me interest yet. the other 8k is unsub so It's currently accruing interest.
4. Defferment should end in June

I should have approxamily 1300 in extra money a month that I can either use to put into the IRA then pay off the loan or pay off the loan.

So if i put money into the IRA the loan will take around 3 extra months to pay off.

I owe a total of 13,000 counting interest so far.

[jIM_Ohio]

1300 extra per month?

Here is what I would do- if eligible, the IRA should be a Roth IRA.

January: $1000 to IRA for 2007, $250 to student loans, $50 to savings (how much savings do you have now?)
Feb $1000 to IRA for 2007, $250 to student loans, $50 to savings
March $1000 to IRA for 2007, $250 to student loans, $50 to savings
April $1000 to IRA for 2007 (make this contribution before April 15) $250 to student loans, $50 to savings
May $1000 to IRA for 2008, $250 to student loans $50 to savings
June-July-August-September repeat.

Key: make sure the $250 is applied entirely to one of the unsubsized loans from now until June or deferrment ends. If total bill is less than $250 now, just tell student loan company to start payments now, as deferrment is compounding against you now.

Oct-Nov-Dec put the $1000 IRA contribution instead to a cash account (you will be capped for IRA after September's contribution). By end of year you should have

a) $9000 in IRA contributions
b) $3600 in savings account
c) paid $3000 to student loans ($13000 is principal balance now).
$15,600 total used ($1300*12=$15600)

If the student loans are less than $250/month, still send $250 in. if they are more, reduce IRA contribution as appropriate. With $13,000 of debt, $250 will pay it off between 52-120 months is my prediction. Much closer to 52... the payment amount the bank will give you is probably a 10 year (120 month) payoff.

For 2009, adjust IRA contribution to do
a) send $1000 in Jan-Feb_mar-April-May (then stop)
b) send $500 for 10 months (stop in Nov-Dec)
c) send $5000/12 each month

I like doing a) or b) so I have more liquid money each month most of the time. When IRA limits increase, you already have it built into budget to increase the contributions without taking the money from something else.

[getrichslow]

Do not take your loans out of deferment early. There is no advantage to you in doing so, all it does is start ticking away your repayment term and make your payment required.

What is your rate? I assume low, you likely owe about $50 per month on the unsub. Prior poster was correct any payment you make should be applied to the unsub loan, you will have to provide specific instruction to the servicer to make sure it is applied correctly, or make a web payment.

I would come as close as possible to maxing out your 07' IRA. Don't miss the chance to fully fund the year. The few extra months of interest wont ammount to much and there is a tax benefit to paying student loan ineterest. Still payoff the loans as soon as you can.

Congratulations on being in position to be debt free so quickly after graduating!