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January 14, 2022 — 3 min read

Ask Maybe: Pay down student loan debt or contribute to 401(k)?



Travis Woods

This week we have a great question from Peter about paying down student loan debt versus putting money into a 401k.


I have a mountain of student loan debt at 6.8% interest. My question is, should I prioritize paying down my student loans, or should I prioritize putting money into a 401k to start saving for retirement?


Peter comes to us with a scenario in which millions of people find themselves - a lot of student debt and the desire to pay it down and contribute to a retirement account.

There are only two options for the debt. You pay it off, or you pursue forgiveness either via or long-term forgiveness. I would first recommend getting that squared away.

There is a return on paying your debt off because it is not accruing interest. If you're not pursuing forgiveness, I think it makes sense to consider refinancing that debt into a plan with a lower interest rate.

There's probably a scenario that allows you to do both of these, and I recommend you explore it before assuming an approach that accomplishes both isn't possible.

Look at what would need to happen to pay your debt off in 10 years or 15 years. Then, get a monthly draft established, so you don't have to think about making that payment.

Regarding the 401(k), you might commit to making a minimum contribution that qualifies you for an employer match if provided. Concurrently, you might consider setting a target savings rate (e.g., 10% of your income).

The math might not make sense to accomplish both. If not, you'll have to decide what hurts more - taking longer to pay your debt off or not contributing to a 401(k).

It's also possible doing both makes sense from a spreadsheet perspective but not from a sleep-well-at-night perspective. It is not uncommon to be aggressive in debt paydown, regardless of the financial benefit.

You can't discount what helps you sleep better at night. If that means forgoing 401(k) contributions to pay the debt down quicker, go for it.

To recap, you want to decide the outcome for your debt (payoff or forgiveness) and then determine if addressing debt and making 401(k) contributions is possible from the spreadsheet and sleep-better-at-night perspectives.

There are most likely a million different "right" answers here. Focus on what works best for you and commit to it.

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