My first job offers a 401(k) match, but I have student loans. Should I bother?

The question

An illustrative letter.

The answer

My dear, congratulations on your first real job. You are asking this question in your first weeks, and that already puts you ahead of many people who only look at their retirement plan years later. The short version is simple: that match is money your employer is offering to pay you. Let me show you why it is worth collecting, even with loans to repay.

How does a 50 percent match work?

Your employer adds 50 cents for every dollar you put into your 401(k), up to 6 percent of your pay. So if you contribute 6 percent, your employer adds 3 percent. Contribute less, and you get less. Contribute nothing, and you leave the whole 3 percent on the table.

Say you earn $50,000 a year. Six percent is $3,000 a year, or $250 a month. Your employer adds $1,500 a year. That is $1,500 of pay you only receive if you save.

Why not put everything toward the loans first?

Because nothing else you do with that money pays you back 50 percent the day you do it. Few student loans charge anything close to that rate. Every dollar you put in up to the match limit becomes a dollar and a half, before it has earned a cent of growth.

And it does grow. If that first year's match of $1,500 grew at 6 percent a year, which nobody can promise, it would be worth about $15,000 forty years from now. That is from a single year's match. Starting in your first job gives your money the one thing you can never get back later: time.

What will it do to my paycheck?

Less than you might think. Money you put into a traditional 401(k) comes out before income tax is taken, so $250 a month in your account usually shrinks your take-home pay by less than $250. Many plans also offer a Roth 401(k), where you pay the tax now and the money comes out tax-free in retirement. Early in a career, when your tax rate is often lower than it will be later, many people choose the Roth for some or all of their savings.

Can my loan payments earn the match?

Possibly. Since 2024, employers have been allowed to count the payments you make on your student loans as if they were contributions to the plan, and match them. Not every employer offers this, so ask HR whether yours does. If it does, your loan payments could earn the match on their own.

How do I keep up with the loans?

Make every payment, on time, every month. Missing payments damages your credit and can add fees, so the loans always come first in that sense. Then:

• List every loan with its balance, interest rate, monthly payment and who services it.
• Set up automatic payments. Many federal loan servicers lower your interest rate slightly when you do.
• Put any extra toward the highest-rate loan, once your match and a small emergency fund are in place.
• Think carefully before refinancing federal loans with a private lender. You may lose federal protections, such as repayment plans tied to your income and the chance to pause payments in hard times.

What does vesting mean?

Your own contributions are always yours. The match may vest over time, which means you only keep all of it after you have worked there for a set number of years. Your plan documents will show the schedule. It is still worth collecting, because even a partly vested match is money you would not have otherwise.

If you change jobs one day, you can usually take your vested savings with you, by rolling them into your new employer's plan or into an IRA. Avoid cashing out when you leave. Taxes and, in most cases, an early withdrawal penalty can take a large bite, and the years of growth are lost.

What do I do inside the plan?

Choose how your money is invested. Many plans place new savers in a target-date fund, which spreads your money across many investments and grows more careful as your retirement year approaches. For most people starting out, a broad, low-cost fund like that is a sensible place to begin. Check the fees, since lower costs leave more of the growth for you.

What is a simple order to follow?

It can help to write your money plan down in a simple order, so each payday you know where every dollar goes without deciding all over again:

• First: every loan payment, on time.
• Second: enough in your 401(k) to collect the full match.
• Third: a small emergency fund, so a surprise bill does not go on a credit card.
• Fourth: extra toward your highest-rate debts.
• Then: each time your pay rises, raise your 401(k) contribution by a percent or two.

You do not have to choose between your past and your future. Pay your loans faithfully, collect what your employer offers, and let both work for you at once.

One thing to do this week

Set your 401(k) contribution to 6 percent, and ask HR whether the plan matches student loan payments.