April 13, 2008 • Personal Finance / Money Matters [1] Email [2] Print [3]

Q: I have about $2,000 saved up . . . Should I pay off my student loan, or pay into my 401K [4] at work?

A: It depends on whether the nonprofit you work for matches your contribution to your 401K (or 403b [5]) account. At many nonprofits, for example, if you contribute $2,000 into your 401K, your nonprofit employer will match it with $1,000. If this is your situation, contribute the $2,000 to your 401K.

On the other hand, if your employer does not match your contributions, it's better to put the $2,000 into an IRA (Individual Retirement Account) [6], which you can set up at your bank (or broker, if you have one).

From a purely financial viewpoint, you would be better off with the IRA than paying off the student loan. First, the student loan almost certainly has lower interest fees than the interest income you would be earning on the IRA. Second, your contributions to your 401K are done before your taxable income is calculated: that lowers your payroll taxes and income taxes at the end of the year.

Of course, the intangible benefit of having paid off your student loan may be worth the relatively small difference on $2,000. Most importantly of all, congratulations on having saved $2,000!