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What's Better... Paying Down Your Student Loans or Contributing to Your 403(b) Retirement Account at Work?

Nobody likes being in debt. And most people do what they can to get out of debt as quickly as possible.

What should you do if you're carrying a lot of student loan debt? Should you allocate all of your extra money each month towards paying down those debts? Or should you begin to contribute to your 403(b) or 401(k) retirement account at work, even if that means extending the time it will take for you to get out of student loan debt?

Believe it or not, you'll probably be better off NOT putting all of your extra money towards your student loans. Instead, allocating a portion of your monthly budget towards saving for retirement probably makes for a better long-term financial strategy.

Let's take a look at an example. In this example, a physician just completed his training, and is saddled with $60,000 of student loan debt accruing interest at a rate of 8% per year. He took a job at a teaching hospital with a salary of $100,000 per year. This physician worked through his monthly budget, and determined that he will have an extra $1,200 per month to divide between paying down his student loans and saving for retirement.

This physician has two options:

  1. He could allocate all $1,200 per month towards his loans, and then start saving for retirement when the loans are paid off, or

  2. He could allocate $600 per month to his loans, and $600 per month towards his retirement savings

Option 1: Allocate $1,200 to Loans Each Month:

Student Loan

Savings Account


After 3 years




After 5 years





Option 2: Allocate $600 to Loans and $600 to Retirement Savings:

Student Loan

Savings Account


After 3 years




After 5 years





That's quite a difference. If he allocates everything to his loans, he will still owe $1,219 on his loans after five years, and will not have saved any money in his 403(b) retirement account. If he splits his money between his loans and his retirement savings, he will still owe $45,305 on his loans after five years. However, his retirement account (assuming a 10% annual return) will be worth $67,757 at the end of the fifth year, which is almost $22,500 more than what he owes on his loans.

Are Those Numbers Correct?

Yes. You need to remember that you pay your loans with after-tax dollars, but fund your retirement accounts with pre-tax dollars. Plus, within your retirement account, you're allowed to invest, and keep the compounded earnings on, the tax savings.

Let's take a look at the math. If you're in the 31% federal tax bracket, and are able to allocate $600 of after-tax money towards your 403(b) retirement account at work, you can actually contribute $875 to that account each month. ($600 / (100% - 31%) = $875).

To look at this calculation another way, you have the choice of contributing $875 to your retirement account each month, or you could take the $875 as salary, pay taxes on that money, and use the rest to pay your loans. If you're in the 31% tax bracket, the tax on $875 is just about $275. That would leave $600 for your loans.

Other Advantages to Allocating A Portion of Your Money to Your 403(b) Plan

Here are some other advantages of putting some money away into your 403(b) plan at work:

  • Most 403(b) and 401(k) plans allow you to borrow money from your account to be used for the purchase of a home.

  • Money can generally be withdrawn from certain retirement accounts penalty-free to be used for a dependent's college education.

  • If you become disabled, the money in your account is available for your use; or if you die, the money in your account goes to your heirs.

  • Psychologically, no one likes being in debt. For that reason, you'll still make every effort to put any extra money, after funding your 403(b) or 401(k) plan, towards your student loan debt.

  • You can't re-borrow your student loans. If you put all your money towards your student loans, and then need money down the road, you'll probably be out of luck, (unless you have a wealthy relative).

Have You Checked Your Credit Report Lately?

May is traditionally spring cleaning month. Why not add checking your credit report to your list of spring cleaning chores? Remember, without a CLEAN credit report, all of your financial dealings become a lot more difficult.

A big problem with the current system is that errors are far too common. Make sure that the information on your credit report is accurate by ordering a copy of your credit report on-line from www.annualcreditreport.com.

To maintain the highest credit score possible, keep these four rules in mind:

  1. Pay your bills on time. Credit bureaus keep a record of the last 24 months' payments made to all of your creditors.

  2. Limit the amount of credit you have access to. Potential creditors take a look at your total available credit when determining your creditworthiness.

  3. Don't max out your credit. As a general rule, potential creditors don't like to see more than 75% of your available credit outstanding.

  4. Minimize the times that you apply for new credit. Multiple inquiries can be interpreted that you're having financial difficulties.



Income Taxes

Saving and Investing


  • Good time to make semi-annual donation of clothing and household items to charitable organizations

2000 & 2001 TAX FACTS

  • For 2000, the standard deduction for a single individual is $4,400 and for a married couple is $7,350. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.

  • For 2000, the personal exemption is $2,800. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.
  • The maximum earnings subject to social security taxes has been increased to $80,400 in 2001 from $76,200 in 2000.
  • The standard mileage rate has been increased back to $.345 per mile as of January 1, 2001 from a rate of $.325 per mile during 2000.
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan remains at $10,500 for 2001.

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