Dear readers, I have a question that I can't decide, and I'm hoping I can solicit your feedback.
As you know, I have around $19k of student loans outstanding. I also have a loan against my 401k, which in my pre-Mustachian days I took to scrape together a down payment for my house. Well, suddenly I find myself with enough cash to cover the 401k loan, and I'm wondering: should I close out my 401k loan, or should I toss all that money at my student loan?
Here's some more background:
After last month's student loan payments I was light on cash. Then I hear from my company's HR department that accounting had made a mistake processing my 401k loan paperwork last year. As I think I mentioned before, in addition to the loan I took a hardship withdrawal (yeesh, I really wanted this house). The terms of a hardship withdrawal are such that you can't contribute to your 401k (or get company matching contributions) for six months. Except that somehow their communication wires got crossed between the HR department and the 401k company, and they kept my payroll contributions flowing. The way the 401k company rectified this situation was to cut me a check for the amount of money that I shouldn't have been able to contribute for that six months.
Yes, it sucks that I missed out on six months of 401k contributions, and six months of company matching contributions. I made that decision and I'll accept the consequences. But the silver lining is that I've got an extra $2400 cash that I can use to pay down debt.
The total balance in my cash accounts is $5100. In addition to the $2400, I've been setting a few hundred dollars aside per month both as a cash buffer and so that I could pay off my 401k loan. There's about $3200 outstanding on the 401k loan, and I need to pay it off all at once by sending a certified check.
But now that I'm looking at all this cash in my account, I'm visualizing taking my student loans down from $19k to near $14k, and it looks pretty good!
The interest rate on my 401k loan is 4.25%, which I'm paying with after-tax dollars back into my 401k account. The payments are $38.91 twice a month, with a five-year term that I'm about 14 months into. So the increased cash flow would be small. There is a $50 "maintenance fee" charged once a year, so that's a reason to pre-pay this loan, but it's already happened in May so I won't get hit again until next May.
Basically the choice is between a debt snowball approach and a highest-interest-rate-first approach. In recent weeks I've been leaning toward just sending all but a few hundred dollars to pay off the student loan.
What do you think? One fewer loan to think about, or 25% off of my student loan?