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Maximize payments to student loans vs contribute to 529?

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  • Maximize payments to student loans vs contribute to 529?

    I currently have about 290k of student loans, some of it refinanced. Unfortunately I have one consolidated med school loan that is actually 4 loans I consolidated at the end of medical school. The 4 loans are all tucked into 1 loan. There is about 75k at 2.8% and 75k at 4.75%. I don't think I can break them up to refinance, but extra payments will go towards the higher interest.

    At the rate I am going they should be all gone by 7 years.

    With that in mind, I also have 2 kids and have a 529 set at 350/month per kid.

    Question: Keep going on the 529 while kids young to save on profits later or just pay my loans faster?

  • #2
    Personally I'd max out any tax advantaged retirement accounts and then put the rest toward student loans and hold off on the 529 right now. You can always cash flow part of tuition if needed.


    • #3
      Usual recommendations are as follows:

      1) Contribute to retirement accounts to employer match.

      2a) Throw all your extra money at the student loans using the mathematical debt snowball,  meaning pay off highest interest loans first with lowest interest rate loans last.

      2b) If you have credit card debt/other high interest debt mix them in with your student loans, rank all your debts (excluding mortgage debt) from highest to lowest rates and pay off based on interest rates from high to low.

      3a) Max out retirement accounts and HSA once your student loans are paid off.

      3b) Fully fund an emergency fund of some sort.

      4) Fund kids' 529s.


      • #4
        529s are last priority IMO - but if you live in a high income tax state, like NY, wouldn't hurt to start contributing a little bit there. I do the max state deduction amount here at 5K/year. So it's not much and for 1 kiddo only. If no state deduction I'd pour that extra $700 into loans.


        • #5
          Is there a state tax deduction or credit for 529 contributions? If so, then capture it.

          Paying for college is a little like the emergency oxygen masks on an airplane: put your own mask on before helping others.


          • #6
            FWIW...We paid our loans off before starting to contribute to 529's.  When our loans were gone, we took the same amount and divided it between the kids' 529s.


            • #7
              With the stock market roaring right now, I think paying off student loans as a first priority is a good approach.  Especially since your interest rates aren't all that great on those loans.  You'll be able to fund your 529's once the loans are gone pretty easily.


              • #8
                Thanks for the replies. My state has a pretty modest tax deduction so I will just do that up to the limit. I like the idea of switching from paying off my loans then going right to the 529s as suggested by Dr. Mom.  Putting any extra money after retirement accounts to school loans sounds like the safest bet, though it delays me getting to the "20% gross savings" goal suggested on this site.


                • #9

                  Putting any extra money after retirement accounts to school loans sounds like the safest bet, though it delays me getting to the “20% gross savings” goal suggested on this site.
                  Click to expand...

                  I'm pretty sure WCI views paying off student loans as part of saving 20% of gross.  Clearly max out qualified funds and anything that has a match, credit, or tax deduction.

                  Once you've killed off the student loans, you can use that monthly payment towards 529, mortgage, taxable account, or a combination of those things.  It sounds like you're already doing a great job!


                  • #10
                    Given that you didn't mention retirement accounts, I am presuming you are maximizing those and they are not included in your decision.

                    How old are your children (i.e. how far away from college?) That would affect my recommendation.

                    Is this an either-or decision or do you have cash flow leakage?

                    Finally, $75k at 2.8% is not a loan I would be especially concerned about; $75k @ 4.75% is another matter. You didn't mention other assets but if you have enough home equity, you might consider a home equity loan for at least part of the 4.75% loan to trade deductible for nondeductible interest.
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