Prioritize Student Loans or Benefit from 401(k)?

Kimberly Watson, Editor in Chief
August 28, 2012 /

Making a decision regarding, ranking your financial goals, could involve considering the relative benefits of 402K or student loans. This is not an easy decision to make and understanding the related calculations is crucial. Taking advantage of the 401(k) plan offered by your employer with a matching contribution, will give you a one hundred percent financial gain. This is a significant benefit when compared to your student loans for which you are only paying a six percent interest on the money borrowed.

Your decision regarding 402K or student loans could provide emotional benefits from paying down debt, whereas, contributing to a 401(k) plan would reduce gross income by four percent. This factor needs to be considered as it could create difficulty in maintaining payments towards your student loan balance. You should review your current spending pattern and potential improvement to your budgeting to obtain full advantage from your employer’s 401match. However, view the situation from a long term basis instead of an immediate perspective.

One aspect that could be considered between 402K or student loans is loan consolidation, which would enable easier loan repayments in single amounts. It must be taken into account that you could sacrifice any benefits provided by the original loans. Your repayment times could also be extended resulting in additional interest being paid for the loan term.

Other options to consider are various loan forgiveness programs which offer eligible federal borrowers with financial challenges to cap their monthly commitments. The loan forgiveness could in certain circumstances eliminate federal student loans. Income based repayment plans are based on adjustable gross income. This factor is an influence regarding 402K or student loans as your plan contribution could reduce your AGI, possibly with a reduction in your student loan repayments.

When considering 402K or student loans it is crucial for the younger generation to set their goals on repaying loans and savings for retirement. Objectively, it would not be advisable for you to sacrifice a one hundred percent of your 401(k) contributions. Your contributions are able to start with the minimum amount, which can be increased with your salary rises. If possible, make additional payments for your student loans as this will repay them early.

 

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