Pay Off My Student Loan or Pay Into a 401K?

At student has $2,000 saved up and wonders if she should pay off her student loan, or pay into a 401K at work.

Pay Off My Student Loan or Pay Into a 401K?
2 mins read

Different situations call for different solutions.

Q: I have about $2,000 saved up… Should I pay off my student loan, or pay into my 401K at work?

A: It depends on whether the nonprofit you work for matches your contribution to your 401K (or 403b) account. At many nonprofits, for example, if you contribute $2,000 into your 401K, your nonprofit employer will match it with $1,000. If this is your situation, contribute the $2,000 to your 401K.

On the other hand, if your employer does not match your contributions, it’s better to put the $2,000 into an IRA (Individual Retirement Account), which you can set up at your bank (or broker, if you have one).

From a purely financial viewpoint, you would be better off with the IRA than paying off the student loan. First, the student loan almost certainly has lower interest fees than the interest income you would be earning on the IRA. Second, your contributions to your 401K are done before your taxable income is calculated: that lowers your payroll taxes and income taxes at the end of the year.

Of course, the intangible benefit of having paid off your student loan may be worth the relatively small difference on $2,000. Most importantly of all, congratulations on having saved $2,000!

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Blue Avocado is an online magazine fueled by a monthly newsletter designed to provide practical, tactical tips and tools to nonprofit leaders. A small but mighty team of committed social sector leaders produces the publication, enlisting content from a wide range of practitioners, funders, and experts.

Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. Views represented in Blue Avocado do not necessarily express the opinion of the publication or its publisher.

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