Pay Down Student Loan Debt or Invest In a Traditional 401(k)?

April 22, 2019

Student loan debt in the United States has amounted to $1.5 trillion according to the Federal Reserve. This large student loan debt burden has affected many young people who are looking to start families and create a life for themselves. Despite this tough obstacle, many young people still have excess savings and need to determine what to do with these savings. Should they take their savings and invest in a traditional 401(k) or use that savings to pay down their student loan debt? We’re going to share different situations all spanning 10 years that involve paying down student loan debt and investing in a traditional 401(k) plan.

Let’s say you have a taxable income of $150,000 and file taxes jointly with a spouse. Under the new 2018 tax brackets, your effective federal tax rate is 16.59%. Let’s also assume you have $70,000 of student loan debt with 10 years left at a 7% interest rate. Your monthly student loan payment would be about $812.76 assuming you’re making the same payment amount every month. What should you do? Pay down the student loan or invest in a traditional 401(k) account?

Income: $150,000

Effective Tax Rate: 16.59%

Student Loan Debt: $70,000

Monthly Payment: $812.76

Term: 10 years

Interest Rate: 7%

Scenario 1 – Paying Down Debt Student Loans Then Investing

Let’s start off by taking a look at how you can pay this debt down faster. Did you know that if you pay an extra $100 a month in addition to your regular student loan monthly payment, you’ll save $4,464.13 in interest paid? Not only will you save money by paying extra every month, but you’ll cut down the overall repayment period by a year and a half. Yes, you’ll be debt-free a year and a half earlier than you thought!

$812.76 + $100 = $912.76 Monthly Payment

After being debt free sooner than expected, you may decide to start investing in your 401(k). If you put all of the money you were paying from your student loan into your 401(k), you’d contribute $1,094.31 monthly.

You may be wondering how you can contribute more money towards your 401(k) than your student loan payment. The answer lies in taxes.

Student loan payments are made with post-tax income. 401(k) contributions are made with pre-tax income. Since a traditional 401(k) account uses pre-tax income, you are able to contribute more towards your 401(k) than you would have your student loan debt with the same income. Though you don’t pay taxes on 401(k) contributions, ordinary income tax will be applied on 401(k) distributions.

$912.76 / (1-16.59%) = $1.094.31 Monthly Contribution

After a year and half of contributing $1,094.31 per month, compounded monthly, at an assumed 7% rate of return, you would have $20,826.09. The investment amount of $20,826.09 combined with the student loan interest savings of $4,464.13 would give you a total 10-year net value of $25,290.23.

Scenario 2 – Investing While Paying Down Student Loan Debt

If you have a higher priority of saving for retirement than paying off your student loan debt, you may want a different option. Let’s see what would happen if you decided to put that extra $100 a month into a tax-deferred 401(k) account. The $100 would be contributed to your 401(k) account instead of your student loan debt balance, but you would continue to make monthly student loan debt payments. Due to the pre-tax nature of a 401(k), your contribution of $100 post-tax would become $119.89 pre-tax.

$100 / (1-16.59%) = $119.89 Monthly Contribution

With an assumed 7% rate of return, compounded monthly, on your 401(k), you will have approximately $20,872.19 in your 401(k) after 10 years.

Scenario 3 – Employer Contributions 401(k)

Some employers will match your 401(k) contributions up to a certain percentage of your income. This could be a real game-changer. Turning down your employer’s 401(k) match is like throwing away free money. If you have student loan debt, but your employer offers a match, consider contributing to receive the maximum employer match. If you contribute $119.89 a month with an employer match while making your normal student loan payments, your money can really grow. If your employer matches the 401(k) contribution dollar for dollar, you will double your investment of $20,872.19 from Scenario 2 to $41,744.37 in your 401(k) account after 10 years.

Contributions to a traditional 401(k) are made prior to your income being taxed. The withdrawals on a traditional 401(k) are taxed. The tax rate that is applied to your withdrawals depends on your tax bracket in retirement. As the average person’s career develops, they typically continue to increase their salary and move into a higher tax bracket. Upon retirement, they will see a decrease in income and move to a lower tax bracket. This means your 401(k) withdrawals could be taxed in a lower tax bracket if done while in retirement, instead of in your working years. Note that this will only be the case if your retirement income is less than your working income.

Scenario 1 – Paying Down Then Investing

Scenario 2 – Investing While Paying Down Debt

Scenario 3 – Employer Contribution 401k

As you can see from the chart above, investing while paying down student loan debt or paying down debt than investing produces almost the same total net value. One debt pays down and investment strategy might perform better than the other depending on the return in the 401(k) account. It’s important to keep in mind that the returns on a 401(k) account are never guaranteed

The real deciding factor on whether to invest or pay down your student loan debt will be if an employer offers a 401(k) match. Matching contributions from your employer will make investing significantly more attractive than paying down debt. If an employer match to your 401(k) is available, it’s wise to take advantage of it.

Your comfort level with your student loan debt can be a large factor in your decision to invest in a traditional 401(k) account or to pay down debt. Knowing whether you are more interested in being debt free or being prepared for retirement can help you make a decision. Let’s look at how student loan refinancing can help you amplify your student loan debt pay down and investment strategy.

In Scenarios 1, 2, and 3, the big question was whether you should use the additional $100 a month to pay down student loan debt or invest in a 401(k). What if you wanted to spend that $100 a month instead? Is it possible to find a way to save on student loan debt while spending that extra $100 a month? You’re in luck! This can be done with student loan refinancing.

Scenario 4 – Refinancing Student Loan Debt

By refinancing your student loan debt, you should be able to decrease the high-interest rate of your student loan. In addition, you should be able to save money over the life of the loan and in some cases monthly.

The total interest you would have to pay on your student loans of $70,000 at 7% interest over 10 years is $27,531.12. If you qualify to refinance your student loan debt to a 5% interest rate, the total interest you would pay is $19,095.03. This would mean that refinancing your student loans would be saving you $8,436.09 in interest over the life of the loan or $70.30 a month. When comparing your new 5% interest rate to your previous interest rate of 7%, not only would you be saving over the life of the loan, but reducing your monthly payment!

$8,436.09 / 120 = $70.30 Monthly Interest Savings

Learn More About Student Loan Refinancing

Scenario 5 – Refinancing and Paying Down Debt Then Investing

Now, what happens if you refinance your student loan debt, pay down the debt, and then start investing? Refinancing your student loan debt will cut your interest rate, saving you $70.30 a month, making your monthly student loan payment now $742.46 instead of $812.76 per month. By taking the additional $100 a month and the $70.30 in student loan savings from refinancing and applying them to your monthly student loan payment, you will be debt free two years and three months sooner than expected. Two years and three months are earlier compared to the one and a half years from Scenario 1. Just a reminder, in Scenario 1, there an additional $100 a month put towards your student loan debt. With refinancing and making the same monthly payment as Scenario 1, you will save $13,017.87 in interest over your original loan.

$742.46 + $70.30 + $100 = $912.76 Monthly Payment

Now that you’re debt free, you can use the money that would have been used for your student loan payment to contribute to your 401(k). Since 401(k) contributions are done with pre-tax income, you will be able to contribute a pre-tax amount of $912.76, which is $1094.31.

$912.76 / (1-16.59%) = $1.094.31 Monthly Contribution

After two years and three months of contributing $1,094.31 per month, compounded monthly, at an assumed 7% rate of return, you would have $32,085.89. The investment amount of $32,085.09 combined with the student loan interest savings of $13,017.87 would give you a total 10-year net value of $45,103.76.

Scenario 6 – Refinancing and Investing While Paying Down Debt

Now let’s try refinancing while you simultaneously pay down debt and invest. In this scenario, you will cut down the interest rate on your student loan debt from 7% to 5% by refinancing. You’ll be contributing the pre-tax amount of the extra $100 a month and $70.30 a month in interest savings towards your 401(k). You will end up contributing a total of $204.17 a month to your 401(k) account.

($100 + $70.30) / (1-16.59%) = $204.17 Monthly Contribution

With an assumed 7% rate of return, compounded monthly, you will have approximately $35,544.87 in your 401(k) after 10 years. Combined with the interest savings of $8,436.09, you will have a total net value of $43,980.96.

Scenario 1 – Paying Down Then Investing

Scenario 2 – Investing While Paying Down Debt

Scenario 4 – Refinancing Student Loan Debt

Scenario 5 – Refinancing and Paying Down Debt Then Investing

Scenario 6 – Refinancing and Investing While Paying Down Debt

As you can see from the chart above, just from refinancing your student loan debt, you can save money and increase your total net value. If you take it one step further and supplement your debt pay down and investment strategy with student loan refinancing, you would approximately double your total net value! By taking advantage of student loan refinancing, you will be able to supercharge your debt pay down and investment strategy. For those who are just trying to save money on student loans or have more money to invest in their 401(k), student loan refinancing is the way to go.

Check Out Our Guide to Student Loan Refinancing

NOTICE: Education Loan Finance by SouthEast Bank is not authorized to provide tax advice or financial advice. If you need tax advice or financial advice contacts a professional. All statements regarding 401(k) contributions assume that you have a 401(k) plan and that you are able to contribute those amounts without contributing more than the current federal law limits.

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Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

Direct Costs of Replacing Employees

A talented employee exiting your company costs you money. Estimates of how much employee turnover costs can vary by industry and employee salary. A study by Employee Benefit News estimates the direct cost to hire and train a replacement employee equal or exceed 33% of a worker’s annual salary ($15,000 for a worker earning a median salary of $45,000). Cost estimates are based on calculatable expenses like these:

HR exit interview & paperwork
Benefit payouts owed to the employee
Job advertising, new candidate screening & interviewing
Employee onboarding costs
On-the-job training & supervision

You can track the expenses of your company’s employee turnover using this online calculator, or create a spreadsheet to determine how actual costs add up to affect your bottom line.

Full Impact of Employee Loss

Josh Bersin, a human resource researcher, writing for LinkedIn, refers to employees as a business’s “appreciating assets.” Good employees grow in value as they learn systems, understand products and integrate into their teams. When one of these valuable employees leaves, the business loses more than just the cost of hiring and training a replacement. Bersin cites these additional factors contributing to the total cost of losing a productive employee:

Lost investment: A company typically spends 10 to 20% of an employee’s salary for training over two to three years.
Lost productivity: A new employee takes one to two years to reach the level of an exiting employee. Supervision by other team members also distracts those supervisors from their work—and lowers the team’s collective productivity.
Lost engagement: Other team members take note of employee turnover, ask “why?” and may disengage.
Less responsive, less effective customer service: New employees are less adept at solving customer problems satisfactorily.

According to Bersin, studies show the total cost of an employee’s loss may range from tens of thousands of dollars to 1.5 to 2 times that employee’s annual salary.

Strategies to Slow Employee Turnover Rates

An effective exit interview helps you and your HR team pinpoint the drivers of your company’s employee turnover. You may find that hiring practices need to be refined or employee engagement should be enhanced. Changes to the break room space, such as fresh fruit or games, will allow your employees to relax and come back to work with fresh eyes and a better attitude. This will keep up the workplace morale, shaping your company culture to include perks appealing to younger workers and will lead to increased job satisfaction. Today’s employees are career-oriented and highly motivated. Keep them on your team with other opportunities such as:

Pathway for advancement within the company
Professional development & advanced education
Flex-time & work-from-anywhere options
Management support & recognition
Lifestyle rewards or amenities like catering & concierge services
Culture of shared values & volunteerism

Add Student Loan Benefits Through ELFI

Student loan repayment tops the financial-worries checklist of many recent graduates. Older team members question their ability to pay for educating their children. New, highly desirable HR benefits like student loan contributions and financial literacy education are emerging from these employee concerns—and ELFI for Business is leading the way for employers to incorporate them into hiring packages. You can connect with ELFI directly from your HR portal and access multiple ways to contribute to employees’ student loan debt. We offer new-hire onboarding booklets, educational newsletters and onsite consultations filled with information for you and your employees. Reach out to us at 1.844.601.ELFI to add cutting-edge benefits to your HR employee package!

Learn More About ELFI for Business

NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the web sites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

2019-06-17

Why Do Employees Leave?

Today’s tight labor market and frequent employee turnover are challenging U.S. employers to view company cultures with a critical eye. A report by the Work Institute found that some 42 million (one in four) employees would leave their jobs in 2018. What is the cost of replacing so many experienced people in an organization? According to the report, last year’s “employee churn” costs hovered at $600 billion—a figure that could increase to $680 billion by 2020. Of further concern to companies is the growing realization that young team members are most inclined to move on after a relatively short period of employment. In a recent survey, 59% of respondents felt they should begin looking for a new position after only one to two years on a job. Older employees continuing to work past retirement age or re-entering the workforce are adding stability to many companies, but the turnover trend has serious implications for the long haul. Why are employees leaving and what can employers do to stem the tide? Data gathered by HR organizations and research firms reveal some interesting trends about motivating and retaining current and future employees.

Top 4 Reasons Employees Leave a Company

The current employee shortage has upended traditional hiring models. Companies are racing to reshape their corporate cultures and embrace the values of a more limited workforce. Although improved pay and benefits packages continue to be important, these four workplace problems are the leading reasons why employees pick up—and move on.

Not enough work-life balance. Team members value their time and don’t want employers to waste it. Their enthusiasm and performance will wane if they are weighed down with busy work and meaningless meetings. Younger employees appreciate flexible schedules, the ability to work from home, and a workload that is challenging without spilling over into personal time.
Poor management. Supervisors who are unable to engage their employees or unwilling to help them grow by providing positive feedback are commonly cited as reasons to leave. Today’s professionals respond to personal interaction and appreciate public shout-outs and ancillary rewards like gift cards, tickets, and free meal vouchers.
Lack of recognition & career advancement. Employees who excel like to be recognized for their extra effort. They also need to see a clear pathway for furthering their careers. Today’s staff members expect companies to help them grow professionally while providing access to career development and mentorship programs.
No company engagement. When a company does not have (or cannot properly communicate) its goals and values, employees lack a shared sense of purpose. Businesses fostering a sense of community are better able to inspire, engage, and retain employees.

Create a Satisfying Workplace to Keep Valuable Team Members

In many ways, today’s workforce is looking for the same type of job satisfaction as high performers of past generations. Respect, appreciation for a job well-done, opportunities for advancement, challenging work, and monetary rewards still lead to employee satisfaction and engagement. According to Gallup research, 34% of employees are engaged at work, but 53% are not engaged and likely to leave a job for another offer. To involve these employees and access their potential, employers are putting greater emphasis on corporate culture assets like these:

Relevant workplaces with a clear mission & shared values
New-hires who contribute to the corporate community
Greater creative freedom & autonomy for staff when possible
Updated technology to support performance
Employee input as valuable business partners

Learn More About The Act Regarding Student Loans and Employers

Student Loan Benefits Appeal to Workers of All Ages

Many young employees begin their careers with a heavy burden of student loan debt. They worry about the monthly toll payments will take on their starting salary. Will they have enough money to travel, buy a home, or start a family? Worries about student debt repayment are not limited to the youngest workers. Some data suggest that these concerns cut across age groups and include professionals over age 55. Older workers may have taken on student loan debt to fund advanced degrees or send a child to college. Widespread student loan debt suggests that companies offering repayment contributions and other related benefits have a distinct advantage in attracting and engaging their workforce.

Improve Retention With Cutting Edge HR Benefits From ELFI

As an ELFI business partner, you can add value to your benefits package with monthly contributions to student loan debt. You’ll also plug into resources like newsletters, webinars and onsite consultations. Connect with ELFI from your HR portal and discover how significant student loan benefits are to your team members—and how cost-effective they are for your company.

Tops Ways to Engage Millennials at Work

2019-06-12

Should You Pay Off Student Loans Immediately or Over Time?

When you start your post-college career, you may be tempted to breathe a sigh of relief. Before you do that, you have important decisions to make. You’ll have to stretch your paycheck to cover your new lifestyle and associated expenses: a furnished home or apartment, vehicle, insurance, and hopefully a 401K contribution. If you are like 70% of college graduates, you also have student loans that need to be repaid. In most situations, it's going to be most beneficial to pay off your loans as quickly as possible so that you are paying less towards interest. The average college graduate's starting salary, however often cannot allow for enough additional income to cover more than the regularly scheduled student loan payments. Most student loans have a six-month grace period so you can do some budgeting and planning first - if you need to. We don't suggest using the grace period unless you find it necessary to organize your finances. During a deferment such as a grace period, the interest could still be accruing depending on the type of loan that you have. If you determine that you may be better off establishing sound financial footing and a workable monthly budget before you begin repaying those daunting loans. Keep these tips in mind as you formulate a strategy for debt payoff.

Student Loans Have Advantages

Varying types of debt are governed by different laws and regulations. Banks often base interest rates for consumer credit loans on your established credit rating. Interest rates for auto loans or credit card debt tend to be higher than a mortgage or student loan interest. As you review your debt load and make a plan, remember: student loan debt comes with a few "advantages" that other types of debt don’t offer.

Preferential tax treatment: With a new job, you will be paying taxes on your income. Student loan interest is deductible up to $2,500 and can be deducted from pre-tax income.
Lower interest rates & perks: Federal student loans have lower interest rates and are sometimes subsidized by the government.
Lender incentives: Private student loans may come with incentives from the lender that make them a better deal than other credit types. These include fee waivers, lower interest rates, and deferment options.
Flexible payment plans: Options for lower payments and longer terms are available for both federal and private student debt.
Build your credit score: You can build your credit score with student loan debt. Now, depending on whether you’re making on-time payments or not, you could negatively or positively affect your credit. If you chose to make small payments during deferments, or a grace period, and regular on-time payments you will be more likely to establish a favorable credit record and reduce the amount of interest you pay overall.

Programs to Help You With Student Loan Payments

There are few options for loan forgiveness with regular debt, but student loans offer opportunities to reduce or eliminate your debt. These may come with commitments and tax implications, so be sure you fully understand them if you decide to take advantage of these programs.

Loan forgiveness: Federal student loans may be forgiven, but you'll want to be sure that you're following all of the requirements needed of the program. Be sure before choosing this option that the federal loans you have qualify for the program. Also, keep in mind there could be taxes due on the amount that is forgiven. Some student loan forgiveness programs include PAYE (Pay as You Earn) and REPAYE (Revised Pay as You Earn), Public Service Loan Forgiveness, and Teacher Loan Forgiveness.
Loan Consolidation: Multiple student loans can be consolidated into one payment with the interest rate determined by a weighted average of your current loans - interest rates. Combining multiple loans may be easier to manage on a modest starting salary. Consolidating federal loans usually doesn’t require a good credit score, either.
Refinance, and you could achieve a lower interest rate: Lenders like Education Loan Finance specialize in student loan refinancing, and have options like variable interest rates and flexible terms. Refinancing your debt could make student loan debt easier to manage than other types of credit.

Pay Off High-Interest Debt First

Before you decide to pay off your student loans, think about the financial obligations you’ll be taking on. Instead of carrying a credit card balance or making low payments for an auto loan, it makes sense to continue your low student loan payments and pay off more expensive debt first or debt with a higher interest rate. In the long run, you’ll save money and build your credit score. If you still have doubts about not paying off student debt first, consult a professional financial advisor for help prioritizing your goals and setting up a budget that lets you achieve them.