Should I Save for Retirement or Pay Off My Student Loans?
If you were fortunate to jump out of college into a lucrative career, this question would be easier to answer. For most graduates, it is not as simple. After the escalating cost of tuition and the extended years it takes to complete college, it is not uncommon for graduates to owe a minimum of $50,000 on up to $150,000 dollars in student loan debt. This is the price for opportunities, education and career advancement.
Between inflated living expenses, fluctuating career opportunities, and taxes, there is not so much money to spread around for paying bills and for saving for that retirement you had planned on. So, what is the best choice? Start saving for retirement or pay off those hefty student loans?
This is a life question for making a strong financial future which is positive. You want to live a certain standard of living, be able to stash money away for retirement, but those student loans are not going to pay themselves. This becomes a question of balance, and knowing where to put every dollar where it will be maximized.
Understand the three choices:
- Choice 1: Pay off your student loans now and save for retirement later.
- Choice 2: Save for retirement now and make only the minimum student loan payment required.
- Choice 3: Try to find a healthy combination of paying off your student loans and saving for retirement at the same time.
Choice 1: Pay off student loans now and save for retirement later
Believe it or not, the most common mistake college grads make is to pay off their student loans before starting to save for retirement. They wanted to hurry and erase these loans and forget they ever existed. Most think they can aggressively get this debt out of the way, and maybe some can, but not everybody. If you actually waited until you had no more debt to save for retirement, you would never be able to retire.
The only time it makes sense to pay off student loan debt immediately and save for retirement later is when your loans are locked into an interest rate higher than 8%. Consider long-term investing returns on the stock market being around 8%, so if you are paying more out than receiving in on a nest investment, your money should be paying off those high interest student loans first. If you have multiple loans, by all means, consider consolidation at a lower interest rate, perhaps with a shorter life term on the loan.
Choice 2: Save for retirement now and make only the minimum student loan payment required.
If your student loans are less than 8%, consider again the stock market returns at 8% over the long haul. Here your money is best being used for retirement rather than student loans. Factor in the benefits of tax deferred growth provided by your retirement funds if you need a stronger case for making only minimum student loan payments.
Choice 3: The compromise: A combination of paying off your student loans and saving for retirement at the same time.
Life is about balance, and everything in moderation. Any student loan which has an interest rate somewhere between 6 % and 8% is a decision waiting to happen about paying those loans off. If the interest rates are even lower, then it is no contest, pay them off now. If you have a little at the end of each check, pay a little more on those loans and then the remaining discretionary income into your retirement account. You are also allowed a small tax deduction for interest accrued on your student loans but only if your income is under $55,000 (single) or $110,000 (married). This can provide a little additional benefit.
Should you face a financial hardship like high medical bills or even unemployment, student loan lenders will allow you to put your payments on hold with either a deferment or forbearance. The problem with this is, your interest is still going to accumulate during that time.
Money saved today for retirement will be more valuable than money saved tomorrow. Learn how to make your money work for you with well-informed investments. Employer sponsored 401 (k) s and individually opened IRAs can be the first place to look. Make a plan of attack and have a goal in mind. For more specific numbers, you can consult a financial planner or use an online retirement calculator from a reputable source such as Kiplinger. Start your retirement with small contributions and increase this gradually as you earn more. Those who start saving early are more likely to stick with it over the long-term.
The bottom line while student loan payments must be made in full, it’s important not to let retirement savings fall by the wayside. It’s better to start contributing something than nothing at all.