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Early career and paying down student loans

Started by BuckNut, September 17, 2018, 11:34:54 AM

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Hi everyone,

I have a question that I'm curious to hear opinions on. I'm only about 1.5 years into my career after finishing school. I was lucky enough to make it through undergrad without any student loans, but was not able to do the same for the first couple years of grad school. I have federal loans that have a 6.25% interest rate. Due to the relatively high interest rate, my thought process is that it is most worth while to dump as much money into them as possible in order to pay them off sooner. As such, my contributions to retirement and other investments has been severely lacking. I work for a non-profit who doesn't do contribution matches, so my 403(b) is solely my own money. I put about 3% of my salary towards it at the moment, because I don't want it to be empty.

So, my question to everyone is "do you think this is the appropriate path to take?" If not, what would you change? I'm aware that the more money I can contribute towards retirement/investments at an early age, the better it will be in the long run, but paying down debt is also a huge step towards that financial freedom we're all looking for.

Anyways, I'm looking forward to hearing opinions and talking through things with everyone!


I'd definitely be interested to hear other people's reactions for this topic but my first instinct would be to continue to go heavy on reducing your student loans. That is a guaranteed 6.25% return on your money, and since we could be in the later stages of growth anyways for this bull market, it may be harder to return 6.25% in the market over the next few years.



I would be focusing hard on getting rid of those student loans. They will drag you down further than any 403(b) could return for you at this stage in the game. I would maybe even look at starting a side hustle to make some extra money to be sure you have the cash flow to really make a dent into these loans. For the future, focus on avoiding consumer debt and piling up retirement because you are right, the earlier you start... the better.

Side note, I would understand if you really love where you are working but the fact that they do not match your retirement is not the best benefit and maybe they make up for it elsewhere? I do not know enough information to speak on that. However, I would also focus a lot of your energy on your income side of finances and growing your career to really see some upward momentum in salary raises. I am also young, and the focus for me now is putting in the work early on to really get some momentum in my salary increases in my earlier years.

Also, I would start structuring a long term strategy with your money to see where you really want to be in twenty years. That way, the choices you make now are building up toward that end goal, whatever it may be.

It might even be better to stop your retirement shortly just to help get those loans done with since you do not get a match anyway. Just my thoughts, I would love to hear what the community has to say.

Very Respectfully,


Do you have cash or other liquid savings for an emergency? I would save 3-6 months of expenses for just that case and then pound that debt out.


Thanks for the replies. Everyone is very much in line with the line of thought I've had since starting my job. Paying down those loans is essentially a guaranteed 6.25% return, which is better than any of my investments at the moment. In the last year and a half, I've paid down about 1/3 of my loan principle. Going forward, I anticipate being able to finish them off within the next 1.5-2 years as long as I can keep up my current rate of pay. The first year was a bit up and down due to moving costs.

My company does not match, but they do offer a pension. Unfortunately, you are not fully vested in the pension until you've worked here for 5 years, which is something I do not see myself doing. Since I'm still so early in my career, I'm not too worried about losing out on the small amount of money that is currently in there when I do decide to move on to another job. This position is more of a stepping stone for me to obtain some experience and relevant skills to my industry.

Young And The Invested

Before answering your question, have you looked into refinancing at a lower rate?  There are numerous lenders with competitive rates.  I've walked a friend through the refinancing process and he received a 6.125% interest rate on a 7-year loan from SoFi. He has a limited credit history and with a higher credit score, he likely would have received a lower interest rate offer.  Before moving forward, I've also advised him to look at credit unions which may offer more competitive refinancing options due to their non-profit status.  I'm not sure what your credit score looks like or if you've looked into any credit unions, but refinancing is always something to consider.

Next, I would recommend not taking an extreme approach one way or the other.  Sure, your 403(b) plan doesn't offer a match from your employer, but you do receive tax-preferential status on those investments that you forfeit each year if you don't contribute.  You should look at those investments on the same playing-field as the student loans and attempt to maximize your expected return. 

By that, I mean if you expect stocks to return 10% on average versus your loans returning 6.25% on average, you should consider contributing more of your excess money to the 403(b) than the student loans.  Also recognize that the 6.25% isn't your true tax-adjusted amount paid since you can deduct up to $2,500 of student loan interest against your taxable income each year.  This lowers the effective interest rate.

While this is the rationed, economic approach on how to view extra money you'd plan to invest or pay off debt, you must also take into account your risk preferences.  If the debt feels overly cumbersome and you'd rather get out from under it sooner, you should probably put more money toward repaying the loans.  You may also have liquidity needs as mentioned by a previous poster.  Debt must be repaid each month whereas investments are not required.  By paying off the loans sooner, you free up liquidity for yourself down the road sooner.

Overall, I would again caution pursuing either extreme.  Much like a sound portfolio, diversification is important.  I wouldn't suggest forgoing one option entirely for the other.


I don't know if anyone commented about this program. You mentioned you work for a non-profit. If that company or organization qualifies  after 10 years a portion or all of your student loans maybe forgiven. There is certain criteria you have to meet but it is definitely worth looking into..


+1 to Young And The Invested on looking into refinancing options. I know several people that have used SoFi. If you find a viable option, it could significantly alter the math behind your strategy. With a lower interest rate, depending on your risk tolerance, you may feel more comfortable carrying the debt in exchange for enjoying (potentially) superior stock market gains.

Another thing to consider strictly from a numbers perspective, depending on your income/tax bracket, would be the value of tax deferral in qualifying you for tax deductions/credits, or simply for the sake of lowering taxes depending on your income trajectory. For instance, in 2018, the student loan interest deduction begins phasing out above a MAGI of 65k for a Single filing status (135k for Married). If you are in or above the phase out range (65k-80k single, 135k-165k married), your marginal tax rate can be quite high, and you may benefit from extra tax deferred contributions to your 403(b) to increase your after-tax return. Same goes for the EITC, Saver's Credit, etc. Reading between the lines, these may not be issues you are facing now, but could be in the near future.

From the psychological perspective, paying off debt can feel pretty great!

Putting myself in your shoes and making the assumption that adjustments to tax deferred contributions wouldn't significantly alter your tax deduction/credit eligibility, I would focus my efforts on paying off the debt. The lack of an employer match for the 403(b) contributions would make me question any contributions at all, depending on your timeline for paying off the loans. You don't want to find yourself behind the curve in retirement savings, but if you put all of those funds towards the loans (and not lifestyle upgrades), I don't see the harm in skipping out for a year or two. You can make up for that lost time by directing your new found cash flow to retirement funds after paying off the loans. This strategy is very similar to what I recommended for a family friend (income of 40k, living w/parents), with the caveat that he contributed enough to his 401(k) to receive the full match from his employer. He was very pleased when he found himself starting off debt free just a year into his career, when his peers would be chained to their loans for the next 9-24 years. YMMV.

Overall, regardless of the strategy, it sounds like you have your priorities straight. Keep up the good work!