Recently, The Wall Street Journal asked a financial adviser a question many young workers are struggling with: Should they focus on paying off their student loans or join their employer’s 401(k) and collect the company match?

San Diego-based adviser Deborah Fox, founder of Essential Planning Services, a wealth-management company, and Fox College Funding, a college planning advisory firm, says in just about every case it makes much more sense to go for the 401(k).

She recently told The Wall Street Journal, employees, even those with tens of thousands of dollars in student loan debt, don’t want to leave their company’s money on the table. They should try to contribute enough to their company’s 401(k) to receive the maximum match available.

And her calculations bear that out.

Student loans v. 401(k)

In all her calculations, Fox used the maximum amount of debt a student would have under a Stafford loan, which is $33,000 (that’s the maximum loan amount of $27,000 plus accrued interest during school).

If a student went with a standard repayment rate, it would take 10 years to pay that off.

Fox said an employee who earns $50,000 per year for an employer that matches 50% of 401(k) contributions up to 6% of pay (a common match) could either:

  • Contribute $3,000 a year to their 401(k), collect another $1,500 in company match dollars and wait the 10 years to pay off the loan, or
  • Redirect that $3,000 toward paying off their loan and have it paid off five years.

She said by taking the first option, the employee would be ahead by more than $6,000 after the 10-year period — assuming the 401(k) earned 6.8% annually. And that’s taking into account tax deductions for both the loan payments and 401(k) contributions.

Even if the 401(k) only earned 3.5%, Fox says an employee would still be better off collecting their full company match.

With a more generous company match, the benefits of the 401(k) can really make your eyes pop.

Electing to earn the full match on a plan offering match 100% of employee contributions up to 5% of pay (again assuming a salary of $50K), and an employee would come out ahead even if their 401(k) investments earned nothing.


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