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Balancing Student Loan Debt with Retirement Savings

This article is slated to be updated with the latest FAFSA, Scholarship, and Financial Information. For more updated information, please refer to our 2023 and 2024 articles.

Welcome to post-graduate life and, with any luck, professional success. Once you’ve bridged the chasm between what you want to do with your new disposable income and what you think you should do, you will find yourself with some life-impacting decisions. Should you put your efforts towards saving for retirement or would they be better allocated to the expedient repayment of student loans? Wanting to make smart decisions with your money is only the first step. A decision made with the most prudent of intentions can come back to bite you later.

Saving for retirement and paying off student loans are both positive uses of your money and it’s easy to see why someone would prioritize the latter over the former. If debt-free living is a financial goal, why wouldn’t you want to use any extra money to get there quicker? Although, repaying student loans is mandatory; bolstering retirement savings, while inexpressibly important, isn’t a legal necessity. It can wait.

On the flip side, so long as you’re making your monthly minimum payments, you are taking care of your financial obligation; anything left over should go towards building your financial future.

So which is the better plan? Both lines of thinking have their merits (at least on a superficial level). Let’s play them both out and see how they end up.

Student Loan Payments Over Retirement Savings

Student loan debt hangs over recent graduates like a dark cloud. For those more prone to compartmentalization paying off those debts can feel like the last vestige of student life before transitioning into adulthood and the professional world. The idea of paying off these loans as soon as possible is an attractive one. However, even if you sink every penny that isn’t otherwise spoken for into those loans (which is unrealistic in and of itself), it’s still likely to take years before you’re done. By that time, you will have worked several years of your life to essentially get back to zero.

Bear in mind, there are circumstances where expedient repayment is the more financially sound option. If the interest rate on your loan is high, specifically higher than the rate of return on your long term investments, you may want to focus your money on paying that loan off to avoid paying more money over a longer period of time. Even in this situation it’s best not to put off retirement savings entirely or for too long.

Retirement Savings Over Student Loans

The reasons for prioritizing retirement savings over paying off student loans are not quite as immediately obvious. This is largely because any dividends may not actually be received for another 40 or so years, while you’re left with only your principal in the present. The gratification of paying off a loan, while not instant, is far less delayed. Also, the financial environment upon your retirement is not set in stone; a lot can happen in 40 years, making the concept all the more difficult to plan for.

As uncertain as the future may be, it’s best to assume you’re going to need as much money as possible. Sorry to say, but retirement is going to hit millennials like a ton of bricks. Inflation over the next few decades is likely to make what would be a respectable savings for someone retiring now, insufficient to maintain quality of life in the future. A recent study has projected that the retirement age for millennials will rise to 75 years old.

If you focus on retirement saving, you reap the benefits of the several more years of interest. Moreover, your employer is likely to have retirement plans that match your contributions. Bottom-line, the longer you wait the more money you miss out on. Perhaps more compellingly, you may qualify for some form of debt forgiveness over time. If you pay off the entire loan before the forgiveness kicks in you could needlessly lose out on thousands of dollars.

Retirement Saving and Student Loan Payments

As is often the case, the best solution is likely a compromise of the two. Financial analyst currently advise saving 10% of your gross income for retirement, if you can up it to 15% it should cut about 10 years off of your estimated retirement age. If you still have extra money, by all means put it towards ridding yourself of your student loan debts (especially the ones with higher interest rates).

An even more effective method of promoting future financial stability starts before you even get to college. Having a strong financing strategy can make massive student loans a nonissue right out the gate.

It really depends on how you are psychologically wired. Some people just can’t stand debt! If psychology doesn’t dictate your decision making, the highest interest debt should be paid first.

With all that in mind, should you be fortunate enough to take care of both, that is a wise decision. If you are in a position where one needs to take priority over the other, retirement saving is the way to go. It may not be as satisfying now, but your future self will thank you for your foresight.

Jim Kraiss has been a Certified Financial Planner (CFP) for over 29 years. He has taught financial planning at several area colleges, written multiple financial planning articles, and authored five books on the subject. With his expertise in designing non-assessable financial instruments for college funding and his previous long-term experience as a Series 7 and Series 63 securities advisor, he has been able to design unique multi-advantaged solutions for our clients.

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