Pay Off Student Loans or Save for Retirement?

By: answerout

Millions of recent college graduates enter the workforce each year as Baby Boomers start to migrate toward retirement. 

All students look forward to getting their first post-graduate employment, however, unlike their ancestors, many students now are dealing with a challenge that few others have encountered: Retirement savings or student debt repayment.

It might be tempting to put off saving for less urgent requirements like emergency funds, retirement, and even marriage if you're working to pay off student loan debt. 

In fact, among college grads with student debts, 34% have put off starting an emergency fund, 23% have put off purchasing a house, 29% have put off starting a retirement fund, and 9% have put off getting hitched.

This is a difficulty. Delaying your savings prevents you from taking advantage of compounding throughout those years. By the time you reach 65, even modest sums might build up to sizable aggregate profits. 

You shouldn't have to decide between them. You may create a plan to pay off student loans while simultaneously putting money aside for retirement with proper preparation.

How Important is it That You Pay Back Your Student Loans?

Being debt-free is a priority for some individuals but not for others. Go for it if paying off your school debts early is a top priority for you and doing so would make you happier than having a sizable investment portfolio in addition to your retirement assets.

Make it easier on yourself by selecting biweekly payments rather than monthly if you want to pay off your debts more quickly. 

Calculate your finances correctly so that later you do not use apps like moneylion instacash because you have paid all the money on the loan, but there is not enough for food. You may also make numerous payments each month automatically with certain lenders.

Utilizing tax returns and additional income from side employment to make lump-sum loan payments on your amount are two more strategies to prioritize repayment. 

If there is a student debt repayment program provided by the company where you work, you may participate in it.

If You Have Student Debts, How Much Should You Be Saving for Retirement?

The information you've read up to this point may have convinced you to put retirement savings on hold in favor of paying off your debt as fast as feasible. Although some personal financial professionals do advise doing so, it's not quite that easy.

Retirement is probably going to cost much more than your college debts, and saving takes a lot of time since compound interest needs time to work its magic. 

If you put off saving until after your student loans are paid off, you'll need to put aside much more money each month to catch up.

You may strike a balance in your spending so that you can give retirement savings and student debt repayment top priority. Here are a few questions to consider before you begin:

  • How much does the interest on your student loans cost? Student loan interest is often less than the return you may anticipate from the stock market. As a result, you would actually be making more money on your retirement funds than you would be paying in interest on loans. The more sense it makes to put money toward retirement savings, the cheaper your loan interest will be.
  • Does your company match your payments to retirement plans? The retirement contributions made by workers are often matched by their employers up to a certain proportion of their pay. It makes sense to use this perk if your company offers it as it is essentially free money.
  • How can you maximize the tax advantages? Contributions to retirement accounts offer tax benefits. Additionally, interest on student loans is tax deductible up to $2,500 in 2020. Examine your particular circumstances to determine whether you can save for retirement and pay off your student loans at the same time to maximize both tax advantages.

Balance Your Savings Objectives

There isn't a one-size-fits-all solution when it comes to student debt and retirement funds, but the goal is to make room for both if you can.

It's very vital to make all needed monthly payments on time if you have a lot of debt since missed payments might lower your credit ratings. However, if you have extra cash, it's a good idea to save at least part of it rather than making a more aggressive effort to pay off your debt. 

Too many individuals make the mistake of planning to start saving until they have paid off whatever debt they may have without recognizing how time-consuming debt repayment may be. 

After five and then ten years, they still haven't finished paying it off. They haven't begun conserving anything in the meantime either.

No of your age, it's crucial to avoid squandering your funds. Even if your first payments are minimal, give both financial responsibilities top attention. Compound interest enables a paltry $50 per month to grow to $100,000 in 35 years. 

Instead of adding more money to your bank account as you pay down your student loans, think about increasing your monthly retirement payment. 

While you are 20 years old, you can be sure that you will definitely pay off your debt, but as the survey showed, people aged 45-65 are sure that they will never pay off their debt. 

Although people aged 18-44 definitely want to say goodbye to credit. You should not sacrifice one thing, because situations in life are different. And being retired without money is a bad alternative.

Adults who think they will fully pay off their student loan debt in the United States, in 2022, by the age

Everyone should believe they can achieve essential objectives like living debt-free and having a comfortable retirement. To achieve each milestone, you must learn to balance your financial strategy.

Bottom Line

You can take control of your student loan debt by starting by making a flexible financial plan. 

There are methods to include your payments into your budget without neglecting the need to set aside money for retirement or pursue other significant financial goals.


leave comment


6 - 2 = ?