Is It Best to Pay Off Student Loans or Save For Retirement?
Is it more strategic to put money into your retirement account or put any and all extra cash towards your student loan debt?
If you're like a lot of recent graduates you’re probably thinking that since retirement is so far away and student loan debt is right now, you should focus on what’s in front of you first.
That’s understandable — but it’s not necessarily the best way to think about your finances.
How student loan debt hurts retirement savings
Today, bachelor’s degree recipients with student loans graduate with an average debt of $37,172. That can be a heavy mental load to carry.
And there are very good reasons for wanting to deal with that debt immediately. The findings from a recent Morningstar report show that every additional dollar of student loan debt reduces retirement savings by an average of 35 cents.
Why? Because the money you would have invested in your future is now being spent paying off your debt.
What you can do
While making your student loan payment each month is important, you should also be considering how you can maximize your retirement contributions.
Depending on the retirement plan you’re eligible for, the contributions you make could be matched by your company, come with tax breaks, or see a significant growth due to compounding interest. These are all wins for your financial future and should not be ignored in favor of paying down debt.
So how can you save for retirement while making headway on your student loans at the same time?
The 50/50 plan
Consider splitting the funds you have left-over after you pay your bills.
Use 50% of those dollars to pay ahead on any student loans that have an interest rate higher than 3.75%. Use our calculator to see how paying extra can take years off the life of your loans.
If you refinance your student loans to a lower interest rate, you can make even faster progress in your debt repayment. With a lower interest rate, more of your payment will be applied toward your loan principal every month, rather than loan interest. In fact, many people save more than $15,000 or more over the life of their loans after refinancing.
Then put the 50% of your surplus funds toward your retirement. Remember that the average annual returns in the stock market can match (and possibly beat) the interest rate on your loans, so any dollar you put toward retirement has the likelihood to turn into multiple dollars down the road.
Want to see if you’re Refi Ready? It only takes 15 seconds to find out how much you could save.