How to Decide Between Paying Off Student Loans or Saving for Retirement
One of the toughest questions you will face in life will be: Do you pay off your student loan debt or do you save for retirement?
In today’s world, college graduates leave school with a soaring amount of student loan debt and over 43 million Americans hold some form of student loan debt. In fact, many students graduate with about $30,000 in debt once they complete their four-year degree. Depending on the career path you choose, you could end up graduating with as much as $150,000 in debt.
Student loans are almost a necessity to go to school and further your education. Not all students have enough money saved up to pass by student loans. While student loans may seem helpful, remember, you do have to pay them back and once you take them out, you will be responsible for paying for them.
But, the real question that needs to be answered is do you pay off your student loan debt or save for your retirement? Let’s take a look at the options to help you make the right choice.
1. Pay Off Your Student Loans
Your first option is to simply pay off your student loans now and save up for your retirement later. This is a big mistake for most students and one that is often made. While you may think that your student loan debt is temporary, it could take you 20 years to pay it off.
You should consider this option if you have high interest rate student loans. If your interest rate is around 8 percent or higher, you should pay off your student loans first. Chances are you won't make much more than an 8 percent return on your investments, so it would be wise to pay off your debt first and save later.
2. Save for Retirement
Your next option is to save for retirement while only paying the minimum amount on your loan. This may seem like a feasible option and it can be for some people, but it may not be the right choice for you. This option would mean that you take your entire repayment period to repay your student loans. You may be wasting a lot of money in interest payments; money that could have been placed into your retirement fund.
You should consider this option if you have low interest student loans. You may have received a low federal rate, somewhere below 6 percent, or you may have refinanced your student loans to an interest rate as low as 2 percent!
3. Do Both
Your last option is to save for retirement and pay your student loans equally. The best way to do this is to make your minimum monthly student loan payment and then pay everything else you owe. Whatever you are left with at the end should be split evenly between your student loans and retirement account.
For example, if you are left with $150 after everything, send $75 as an additional payment on your student loans and put $75 in your retirement account.
This option is smart for those who have mid-level interest rates on their loans. This would be anywhere between 6 and 8 percent. You may be able to save money and pay off your debt at the same time!
Choosing between paying your student loans and retirement can be difficult, but it is a choice you will have to make. Option three is the best one as it will allow you to do both while maintaining your lifestyle and planning for the future.