Pay off Student Loans or Save for Retirement?
Most recent college graduates and emerging professionals struggle with the seemingly competing tasks of saving for retirement and paying down student loan debt. As a result, many reach mid-career behind on funding their retirement needs and may still face a mountain of student debt. But these two goals need not be at odds. Every situation is unique and both are important. By following the prioritization guidelines below you can be well on your way to managing the dilemma.
This blog post will assume that you have the income to handle making all necessary minimum payments and is focused on what to attack with any extra dollars. If you struggle with how to budget for the minimum debt service I’d love to have that discussion with you, but for now it’s a blog topic for another day.
Step One: Make the minimum payments
Statistics show that many college students graduate not only with student loan debt, but also with high interest rate credit card debt. Depending on the types and timing of your student loans, interest rates can be anywhere from 4% to 10% or more. While this seems high, credit card rates are even higher with an average rate around 15% and a much higher ceiling. As such, it’s very important not to ignore credit card debt when forming your plan. Start by making the minimum payment for your selected repayment plan to your student loan providers and to your credit card company.
Step Two: Meet the match
Most workers these days recognize that employer matching contributions to a retirement plan are an opportunity for free money. “Meeting the match” is like making the minimum payment, only this payment is to yourself! Your employer is incentivizing you to save for retirement; take the carrot! If you can contribute 5% and your employer will match it with another 5%, for example, you’ll be well on your way to funding your retirement needs. If your company doesn’t match your contributions, then to get started try to save at least 5% or so if you are able.
Step Three: Eliminate consumer debt
Carrying higher-interest credit card debt will be a drag on your ability to make sizable progress toward just about every other financial goal you may have. Any extra dollars at this point should go toward getting these balances to zero. It’s okay to have a credit card, and it really is almost a necessity these days. However, try to ruthlessly attack any ongoing balance you may have and use your card sparingly going forward.
In fact, if you are close to eliminating your credit card balance, it’s sometimes advisable to put “step three” before “step two.” For instance, if you really go after it and know you can be done with the credit card in a year or so, it’s okay to delay saving for retirement if you’re dedicated. If you know it will take several years or more to pay off, you should be even more dedicated but might want to budget for contributing at least something to your retirement plans along the way if you can.
Step Four: Strike down your student loans
At this point you’ve been able to make your student loan payment, you’re meeting the match at work, and you’re free from credit card debt. Congratulations! You’re in a better spot than most! Now it’s time to really go after those student loans! If between your contributions and your employers’ matching you’re saving around 10% of your salary into your retirement plan, use any extra budgetary firepower to take down your student debt. It is important to do both, but if you’re unable to do 10%, try to continue to save at least 5% for retirement. It is okay to back off the retirement contributions some, so long as you go back there first once the loans are gone.
Some will argue that student loan debt is okay because the interest is tax deductible. Sure you won’t pay tax on your interest payments, but you still have to pay the interest! Others will say that you can “make” more money by investing than you can “save” by paying off lower rate student loans, but relying on unpredictable investment returns brings more risk to the equation. Even if your student loan rate is just 5%, that’s a guaranteed “return” on your money. When you invest there are no guarantees, and at the end of the day your student loan represents money you’ve already spent. It’s an obligation and it’s not going anywhere. Putting it off can bottleneck your budget and other goals down the line.
Step Five: Debt free, the way to be
Getting here might take a while, but you’ll be battle tested at this point. Time has gone by and you might have additional needs to save for beyond retirement. Maybe you have a mortgage or have purchased a car. Maybe you want to save for a child’s college education so they don’t have to go through the same cycle you’ve just completed. But now that you no longer have the burden of repaying money spent years ago on your books & tuition, pizza & beverages, you have the flexibility to do some more forward thinking financial planning. You can identify your real financial goals and go after them instead.
So to answer the question: Should I pay down my student loans or save for retirement? The answer is: Yes. And some timely prioritization can help you to make a game plan to be successful with both.
If you would like more details about how to work through this plan or about your specific situation, please call the office at 913-317-6000.< Back to Updates