Pay off Debt and Investing in 401k

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Pay off Debt and Investing in 401k

Postby Sonfish » Sat Dec 29, 2012 4:48 pm

So I am trying to figure out what the best strategy is in order to save the most money. I just heard about the 2013 student loan interest deduction which lasts for the first 5 years and has income restrictions. I have been paying for 2 years now. I am starting to phase out making 65k and investing 5% in 401 pretax. I will be getting a promotion soon and so my questions is should I :
(A) Continue investing 5% to match 401k and pay extra towards loans
(B) Invest just enough in 401k to fully deduct student loan interest and pay extra towards loans
(C) Max out 401k & Roth IRA and pay minimums on loans

Student Loans:
36,500 @ 7.75% (Federal Fixed)
21,500 @ 6.25% (Federal Fixed)
17k @ 6.89% (Private Fixed)

Auto Loan:
18k @ 1.99%

Thanks for your help in advance
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Re: Pay off Debt and Investing in 401k

Postby Sonfish » Sat Dec 29, 2012 10:27 pm

bump^
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Re: Pay off Debt and Investing in 401k

Postby bdpb » Sat Dec 29, 2012 11:05 pm

The deduction limit is 2.5k. You're paying over 5k, so not all of your interest is deductible.
The MAGI limit is 60k.

Contribute 5% to 401k to get the company match.
Contribute over and above 5% to 401k to reduce MAGI to 60k.
Put everything else towards the debt. Pay the minimum on each loan. Pay the extra towards the 17k loan. Although it's rate is not the highest, it is the smallest loan. Once it's paid, it will free up cash flow to continue paying the other loans.

Check your 401k for loan options. 401k loans are often much cheaper than these loans. Borrow from the 401k to pay these debts. At least until your student loan interest no longer exceeds 2.5k.

In a year or two (if rates are still low), refinance your car with PenFed to free up cash flow to pay down other debts.

Cut your spending significantly for a while; ramen noodles, rice and beans, beans and rice. Looks like you may not have done that by spending so much a new car.
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Re: Pay off Debt and Investing in 401k

Postby FNK » Sun Dec 30, 2012 12:12 am

bdpb wrote:Put everything else towards the debt. Pay the minimum on each loan. Pay the extra towards the 17k loan. Although it's rate is not the highest, it is the smallest loan. Once it's paid, it will free up cash flow to continue paying the other loans.

Note: paying off the smallest loan fast feels good, but focusing on the highest interest is most beneficial in the long run. If you have enough patience, pay off the highest interest loan first.

Free cash flow is a good thing, but it's treacherous: if you're disciplined, you don't need it so much; if not, you will misuse it.

bdpb wrote:Check your 401k for loan options. 401k loans are often much cheaper than these loans. Borrow from the 401k to pay these debts. At least until your student loan interest no longer exceeds 2.5k.

Good idea, but be careful: 401(k) loans are for 5 years (large payments) and are accelerated if you lose/change the job (penalty land).
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Re: Pay off Debt and Investing in 401k

Postby Watty » Sun Dec 30, 2012 1:00 am

(A) Continue investing 5% to match 401k and pay extra towards loans

Getting the match is a good choice.

(B) Invest just enough in 401k to fully deduct student loan interest and pay extra towards loans

How much would being able to deduct the interest actually save you?

You need to be careful about doing this since getting the deduction this year might save you some money this year but if this means that you will have the loans for a few additional years then over the long term it might actually end up costing you more. It would be good to make up a spreadsheet to see how these numbers work out over the length of the loan.

(C) Max out 401k & Roth IRA and pay minimums on loans

You interest rates are too high to make this a good option.


Getting a 401k loan was mentioned but this is a very risky option since there are lots of ways that this could cost you if you are not able to pay it back as planned. At many companies you cannot make 401k contributions whail you have a 401K loan so this could also cost you the 401k match.
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Re: Pay off Debt and Investing in 401k

Postby Sonfish » Sun Dec 30, 2012 1:12 am

Ok so I plan on increasing my 401k pretax to 12% next year in order to deduct 2500 for student loan interest. I am not fully vested in my 401k until September but I prefer not to take out a loan on my 401k since I have only 15k in it (7500 being my contributions) and could get me in trouble. My car loan is currently through PenFed right now at 1.99% and I cannot refinance through them. I'm going to continue focusing on the 7.75% loan since I can keep on track and have patience. I have been able to save a lot actually living at home with the parents (no rent or mortgage) but plan on renting with a couple roommates soon. Thanks for your help!
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Re: Pay off Debt and Investing in 401k

Postby Sonfish » Sun Dec 30, 2012 1:16 am

Watty wrote:(B) Invest just enough in 401k to fully deduct student loan interest and pay extra towards loans

How much would being able to deduct the interest actually save you?

You need to be careful about doing this since getting the deduction this year might save you some money this year but if this means that you will have the loans for a few additional years then over the long term it might actually end up costing you more. It would be good to make up a spreadsheet to see how these numbers work out over the length of the loan.

Yes, you're right. I'll have to plug some numbers in a spreadsheet to see if it is even worth contributing extra to my 401k.
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