You accrued student debt because you thought it would pay off in the end. However, many people find that quickly paying off student debt places their retirement wealth in jeopardy.
Of course, this debt isn’t going away. In fact, the amount of student debt tripled between 2005 and 2017. Plus, for those of us who already have this debt, we need to pay it. So, how can you pay off student loans without sacrificing your retirement in the process?
Student Debt and Retirement: The Facts
Research across the years has found that people who graduate from college do financially better than people who don’t. Of course, those who manage to graduate without any student debt do best of all.
In June 2018, the Center for Retirement Research at Boston College released a report about how student debt impacts retirement savings. They found that graduates with student debt weren’t as likely to contribute to their own retirement plans.
In fact, by the age of 30, graduates with student loan debt have about 50% less in retirement savings than peers without debt.
In other words, young and middle-aged adults spend their money trying to pay off their student debt. They do this at the cost of saving for retirement. However, it might be wise to adjust your priorities if you’re one of these people.
Save for Retirement while Paying Student Debt
The best plan for your immediate and long-term future is to divvy up where your money goes. Don’t just spend all of your extra income paying off student loan debt, hoping that when it’s paid off you can finally start saving for retirement. Instead, put a little bit towards debt and a little bit towards retirement as soon as you enter the workforce.
If your employer offers 401K matching, then you should definitely contribute your share. Give the maximum amount allowed to your retirement starting as early in your career as possible. Of course, you might not be able to give the full amount allowed if you’re also juggling student debt. In that case, make minimum student loan payments, and give the rest to retirement savings up to the 401K matching amount.
If you don’t have 401K matching, then it might make sense to pay more towards your student debt. However, you should still set money aside for retirement. The money you put away now earning compound interest will make more for you at retirement age than the money you put away ten years from now.
Scale Student Debt Payments
Many people are eligible for different student debt repayment plans. For example, you can select income-based repayment. Alternatively, you can use graduated payments, which start small and then increase over time. The idea behind both of these offers is that you pay less when your income is low, which it often is at the start of your career. This allows you to put more money towards retirement at this time. As your career grows, and your income grows with it, you can pay more to student debt and still continue contributing to your own retirement savings.
The Middle Years: Debt or Investment?
At some point, you will hit a middle range in your income. You won’t be scraping the barrel, and you will have some extra money. Should you put that towards paying off student debt more quickly or should you use it to invest more in retirement instead. The answer depends upon your loan. This is when you need to look at your interest rate.
If you can invest in a retirement option that provides you with a better return than your student loan interest rate, then you should invest. Alternatively, if you have a high rate of interest on student loans, such as ten percent, then it makes more sense to pay that off before you invest in things like stocks and bonds. If you have the opportunity to refinance your student loan debt in order to get a lower rate, then you might opt for that. Then you can put the money towards investment.
In addition to interest rates, you might also want to consider tax breaks. You get some tax considerations when you pay off student loan interest. On the other hand, you get tax breaks for certain retirement investments. Take the time to do the math. Determine whether you’ll make the most of your money by paying off debt or investing for retirement.
No matter where you are in your career, it’s not too late to shift priorities between student debt and retirement savings. This “middle years math” is the key.
Of course, some people argue that it’s best to pay off all debt first. See that argument here. Share your thoughts in the comments.