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low interest rates...continue 401k contributions instead of saving for school?
 

firstclassflyer's picture
(Monkey, 41
 
Points)
 on 6/3/12 at 2:04pm

I'm debating what I should do... interest rates are at a record low. I can get a student loan for about 4%, using my fathers home equity as collateral/co-sign. Much lower than the 6.8% the federal loans offer.

My thought is that contributing to my 401k is like getting an instant 20-30% return on investment, since it is pre-tax money, not to mention the interest earned over the next 5 years. However, I can't touch that money for decades. (but I can always take money out of 401k with a penalty fee, if I end up in a bad situation)
Also worth noting is that my company's 401k match is a joke, I've calculated I'll be missing less than $1000 in company match.

Originally I was planning to stop contributing to 401k, because I'll need every penny for grad school, but with interest rates so low, I'm debating whether that is such a wise decision.

At the same time, sometimes I think there is a psychological aspect to this as well. Having less debt, can reduce stress, worries, pressure to obtain a job that pays a certain amount, instead of finding the job/company that fits me best....essentially just energy that can be focused towards more positive things.

I would appreciate anyone's thoughts on this...

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Spalding Get Your Foot Off the Boat's picture

Unfortunately the best answer

 
Points)
 on 6/3/12 at 3:09pm

Unfortunately the best answer is: it depends.

Given your situation, it sounds like saving for grad school is a high priority, and i would make sure to fulfill this requirement (to some degree) and do it outside of your 401k plan (maybe within a Roth 401k or Roth IRA though, which I believe have different penalties for earlier withdrawal). Depending on how much you want to save for school and how much you are able to save from your income, it may be possible to also put some money aside for retirement. Assuming that all of your long term assets are located in your 401k / tax advantaged accounts, it's probably okay to heavily weight them with equities (given you are likely young), but in general it's best to locate your most tax inefficient investments in your tax advantaged accounts (REITs, bonds, anything with distributions). The volatility of your future income and the correlation to the stock market should also be considered - if you plan to work on wall street, you should have a higher fixed income allocation, for example (holding all else equal).

bryantmichaels's picture

Don't forget that your pay

(Monkey, 42
 
Points)
 on 6/6/12 at 11:32pm

Don't forget that your pay during an internship and your potential signing bonus can wipe out much of your school debt. Also there are plenty of fellowships and work study programs to lower the bill.

Bryant Michaels
Veritas Prep Consulting

Muhammad143's picture

A brand new investigation by

(Chimp, 1
 
Points)
 on 10/9/12 at 4:14am

A brand new investigation by Charles Schwab is great news for employees, though it may also indicate further hesitancy to hire on the part of employers. According to the investigation, employers are still again matching the 401 (k) benefits of employees at an interest rate unseen since the Great Recession. Read more here

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