Ok sorry for the triple back-to-back posts here but I wanted to let Omar Little know that I have used the online tools to re-allocate my funds to a higher-risk, higher-return investment strategy (I chose three different funds, split up 25%, 25% and 50%). I looked at their recent and historical rates of return, and it looks like I might do a lot better than the 5.7% I was averaging before.
Thanks for the tip!
Classic case of buying high. Equities had a banner year last year.
Sounds like you don’t need to borrow from your 401K, you’re doing fine financially. You should assume your income will rise over time making the debt a smaller portion of your income as that happens.
I’d almost say that using 401(k) funds to avoid bankruptcy would be a bad idea - I mean, those funds are protected, and if you don’t use them, then more of your actual debt might be discharged (just speculating here, not sure of the ramifications).
But yes, I’d strongly hesitate to borrow against the 401(k) in the OP’s situation. It may be a short-term fix but in the long term, you’re quite literally robbing your own future especially if you’re not using every penny of those saved monthly payments to pay down the loan and then augment your contributions in the future.
I’d suggest attempting to pay down that car note first since it’s at the highest rate. Depending on how long you’ve had the loan, you may even be able to refinance it - as in, you’ve probably built some credit by now and if you can get a “used car” loan at a better rate, you might lower your payment (though usual advice: try to make the old payment anyway).
Two things not relevant to the OP but the thread reminded me of them:
Mentioning bankruptcy (not that it’s something the OP is planning!): apparently student loans can NOT be discharged under bankruptcy. Something else to consider if someone finds themselves in a position of only being able to pay a portion of their debts - you’ll still have the student loan so it may be better to pay on that vs, say, credit cards.
And 401(k) money is safe from bankruptcy and lawsuits. IRAs may not be! It may vary by state, and there seems to be some consensus that if you can prove an IRA is a 401(k) rollover vs. your own direct savings, it’s treated as excluded… but IRA assets over a certain amount may be fair game for the lawyers. So it’s something to think of if you’re planning on rolling a 401(k) over into an IRA.
Cool!!
You may want to look at the payoff period for the car loan - and consider putting the excess against that versus the student loan. 1) I gather it’s a bigger savings, interest-wise, and 2) the term is likely shorter. So paying that down faster will free up the entire payment that much sooner, letting you throw THAT against the student loan.
But yes, it sounds like you’re in pretty good shape overall - good for you!!
NO! Access a 401K only in an emergency, and paying off student loans is not an emergency.
If it’s a financial hardship, reduce your contribution.
You’re 26. Do it. Just don’t get fired.
Not to mention that, once your car note is paid in full, you’ll have the option to reduce your auto insurance coverage and save a few bucks that way. It might be worthwhile to you to maintain collision coverage, too, but you could reduce your insurance costs by raising your deductible as well… (Not advice, just mentioning your options.)
No offense, but this is really bad advice. He has his whole life to work on paying off a student loan debt. In the meantime, the interest paid per year will be tax deductible. Paying off as much of the debt per month without running into financial hardship is the most prudent thing to do.
The one thing a young person doesn’t have their whole life to do is save for retirement. There are limits on 401(k) and Roth IRA contributions per year. He’ll never be able to make up for lost time in terms of retirement contributions. At 26, even relatively small amounts contributed to a retirement account will have the benefit of compounding over a long period of time.
Consider the following graph from the Bogleheads wiki. Starting early is the way to build up more wealth even with smaller monthly contributions. You can’t make up for that lost time.
Please note user name when deciding whether to heed this advice 
Well, except for the “don’t get fired” part!! But serious, that’s one big risk of a 401(k) loan: if you lose your job (fired, laid off, or just plain quit), you suddenly MUST PAY IT ALL BACK NOW, or you get hit with tax and penalty.
Anyway, while it sounds like the OP is no longer considering a 401(k) loan, that’s something to remember.
Michelle Singletary (Washington Post columnist) would say to the OP:
She may put “put aside enough to get the full company match” in #2 above, because as you know that is “free money”. But she would definitely be all over getting that debt monkey off your back :).
In a retirement account for a 26-year-old with a buy-and-hold strategy, there’s no such thing as “buying high” really. He should have a strategy of buying low-cost index funds and rebalancing every year. I agree that if he were trying to time the market by buying up equities now that he could end up buying high and selling low, but since he’s buying to hold for 40 years, the performance in any one year is not really significant.
Also, hereis a helpful article on paying down debt vs. investing.
Note the key advice is:
You’ll note there is no advice on taking out a 401(k) loan to pay off student loans. In fact, you should be prioritizing investment over paying off deductible student loans.
Thanks for all the extra advice everyone! Way more than I bargained for 
I think I’ll look at doing what some of you were saying with regards to minimizing my payments on all loans except for the one that’s costing me the most money (not sure if that’s my car loan or my one big student loan: the car loan has a lower balance but slightly higher interest, the student loan has a much higher balance but slightly lower interest… not sure which to focus on), and throw everything at that for a few years.
With the amount of money I make I am not eligible for deducting much of the student loan interest from my taxes so basically most of my student loan tax is really costing me money.
Also, I have and keep well more than just $1000 in easily accessible cash precisely because IF I lost my job tomorrow, I’d like to have a few months of money to make rent, pay loans and such without having to worry about it.
The standard advice is to pay off the higher interest loan first - after all, that’s the debt that’s costing you more to maintain. (Leaving aside whether you lower your insurance costs after paying off the balance.) Once that’s paid, use that “extra” money to pay down the principal on the loan with the next higher interest.
And really, you’re doing great! I wish I’d been as financially prudent as you when I was 26!
Thanks! I’m fortunate enough to have a nice paying job (well it’s a matter of fortune and hard work and getting a physics degree which is inherently valuable but anyhow).
See, that’s what I hear… but I don’t quite follow it. How is higher interest on a lower-principal loan costing me more to maintain than a slightly lower interest on a higher-principal loan?
My car loan (higher interest, lower principal) had $110.25 in interest last month, for example.
My student loan (lower interest, higher principal) had $109.72 in interest last month.
So it looks like I’m paying about the same in interest each month. I thought the interest on my student loan was a little higher. So this point is pretty much invalid.
But what if my student loan principal was even higher than it is, and I was paying $200.00 in interest each month.
Would it still behoove me to pay off the higher interest loan first, even if it’s costing me less in interest, and why? I don’t understand.
Bonus: As I was logging into my car note website, it had this funny notice (copied and pasted for your enjoyment):
While we’re doing maintenance, you can make a payment, check your balance, review payment history, and see all of your profile information. However, you won’t be able to update your profile information.
We should be done** a day ago.**
Dollar for dollar, the higher interest loan costs you more. If you’re paying, say, 10% interest on your auto loan, each dollar you’ve borrowed costs you ten cents per year. If your student loan’s interest rate is 8%, you’re paying eight cents per year for each dollar owed. The difference may be only minimal, but it’s there.
Another way to look at it, though, beyond the pure math:
Let’s say that you have three more years on your car note, and 15 on your student loan. If you throw extra payments toward the car, maybe you could have that paid off in two years, maybe a year and a half. You then have the psychological satisfaction of saying “there, that’s done. Yay me!” And then you can turn around and add the amount you were paying on the car to the payments you’re making on the student loan, and pay that down even more quickly than scheduled - Yay you again!
Another thing to consider: If, by some horrible twist of fate, you were to suffer some financial setback - job loss, unexpected major expense - you’ll only have to use your emergency savings to make one payment, instead of being obligated to make two each month. (Also, if worse came to worst - your car can be repossessed, leaving you in a bind. The repo man can’t tow away your degree!)
Can’t really say I understand the “dollar for dollar” argument (I mean I understand it but I still don’t see why it matters if the absolute amount of interest paid per month on a loan is higher, regardless of interest rates).
But anyhow, just went through and lowered my automatic student loan payments to the bare minimum, which will leave me a whopping $644.53 extra per month to pay toward my car loan, which I already am paying off well ahead of time.
Also, the car loan is already a refinanced loan. You don’t even WANT to know what interest rate I had when I bought the car from the dealership. Yikes it was bad!
Anyhow, at this rate I’ll have over $1000 to throw at the car and if only $100 of that or so goes to interest (I understand less and less will go towards interest as the principal declines), I might have it paid off this time next year (regular maturity date is in 2018!!).
Thanks again for the (sometimes conflicting) advice everyone. I’ve learned a lot.
The repo man may not be able to repossess a degree, but the lender can make life miserable for the borrower and any co-signers. A private lender can, for example, sue you and your co-signers for the unpaid balance and any fees that come with it. Before that point, it can trash both parties’ credit and sic a collection agency and/or servicer on both parties in an attempt to get them to pay something toward the loan. Additionally, states are increasingly tying professional licensure to repayment of student loans; if you don’t do something, you can’t get a license to practice your profession. That being said, however, the banks are sowing the seeds of their own destruction because, although they make borrowers’ lives miserable, student loans are often a money-losing proposition if the borrower can’t pay it back, and the banks often have no good options for forbearance or reduced payments as federal loans do.
So the strategy of paying the car off and then throwing that money toward the private loan is a good one, as long as the private student loan is current and under control.
What they’re saying is that for every dollar you’ve borrowed in a higher interest rate loan, you’re paying more interest than you are in a lower interest rate loan. For example, if you have a $20k loan at 4%, and a 5k loan at 9%, your overall interest will be higher on the 20k loan - 800 dollars if we’re talking really simple interest vs. 450 for the 5k loan.
However, you’re paying 4 cents per dollar on the 20k loan and 9 cents per dollar on the 5k loan, therefore dollar for dollar, you’re paying more on the 5k loan.
Bankruptcy concerns aside, I see where you’re coming from- you’re basically asking if taking a loan vs. your 401k is equivalent to taking out a lower interest loan to pay off the higher interest one.
If it was just a straight loan, then yes, that makes sense. But with 401ks you have a lot of odd stuff like being unable to contribute while the loan’s outstanding and other weirdness that muddy the water considerably.
I’d just pay off the car loan ASAP, since it’s high interest and relatively short duration, and then put the excess toward the student loan once the car’s paid off.
The best way to do this (IMO) is automated payroll deductions into a separate account to pay off the loans. That way, the money’s never in your checking account to spend in the first place, and you can budget around what does go in to the checking account.
No offense taken. I’m not an expert or anything; my qualifications in this field are basically limited to being good with my own money. Anyway, the interest paid per year on the 401(k) loan is being paid back to him, which surely offsets the loss of the tax deduction. The interest accruing on the student loan doesn’t benefit him at all.
I thought this was only true if you didn’t have a qualifying account to roll the 401(k) funds into?
