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Should I pay off my student loans or invest in retirement?
It’s possible to do both — here’s how.
Choosing between saving for retirement and making extra payments on your student loans can feel like a catch-22. You want to make sure you have enough saved up for your golden years, but it’s hard to ignore the heavy burden of student loan debt. While there are situations where it makes sense to prioritize one over the other, it’s also possible to do both.
3 reasons to prioritize saving for retirement
If you find yourself in any of the following situations, it might make sense to save for retirement instead of making extra payments on your student loans.
You’re nearing retirement age
While it’s never too early to start saving for retirement, it can be too late. The closer you get to retirement, the more you’ll want to save each month to ensure you have a healthy nest egg.
Your company will contribute to your retirement savings
If you’re working for a company that will match the amount you’re saving for retirement, take advantage of it. Not only will this boost the amount you’re saving on your own, but you’re literally turning down free money if you don’t participate.
You’re pursuing student loan forgiveness
If you’re eligible for loan forgiveness due to your career or the federal loan repayment plan you chose, it makes sense to pay the smallest amount possible on your loans. This allows you to have the maximum amount forgiven and free up cash to focus on your other financial goals, like saving for retirement.
3 reasons to focus on paying off your student loans first
On the flip side, there are times it might be more beneficial to work on resolving your student loan debt before aggressively saving for retirement.
You have high-interest student loans
If your student loans have unusually high interest rates, you might want to focus on paying them off to avoid excess interest charges. This is especially true if you don’t have the credit to qualify for a lower rate through refinancing.
You have a low student loan balance
Are you close to having your student loans paid off in full? You might want to put your extra money toward paying them off so it’s one less debt to worry about. Then you can start putting what you were spending on monthly repayments toward your retirement savings.
You have a cosigner
If you have a cosigner on your student loans, they’re equally responsible for paying off your debt should you default. This could impact their debt-to-income (DTI) ratio and prevent them from qualifying for other forms of credit, like a car loan or mortgage. If you’re getting pressure from your cosigner to pay off your debt as fast as possible, you might want to focus on making extra repayments instead of saving for retirement.
5 steps to save for retirement and still pay off your student loans
Want the best of both worlds? Follow these steps to both save for retirement while also working to pay off your student loans as fast as possible:
Step 1: Pay off the minimum owed on your student loans each month.
Making your minimum monthly payment should always be your first priority, regardless of any other savings goals. This will prevent your loans from moving into default or going into collections.
Step 2: Take advantage of your company’s retirement plan.
Check to see if your employer has a company-sponsored retirement plan. These typically work by matching your monthly contribution up to a certain percentage. Often your contributions are pretax, meaning the funds are deducted from your paycheck before taxes and Social Security are removed. This makes the dent to your take-home pay a bit less noticeable.
Step 3: Max out your retirement savings.
Once you determine if your company offers a retirement plan, max out the amount you’re allowed to contribute each year. This varies by the IRS based on your age:
- Under 50 years old: $19,000 in pretax contributions per year
- Over 50 years old: $25,000 in pretax contributions per year
Step 4: Don’t have a retirement plan through work? Consider a traditional or Roth IRA.
Individual retirement accounts (IRAs) are ideal if your company doesn’t offer a retirement savings plan. Annual contribution limits also vary by age:
- Under 50 years old: $6,000 per year
- Over 50 years old: $7,000 per year
However, these contribution limits could be lower if you’re contributing to a Roth IRA and exceed the earnings cap set by the IRS.
Compare retirement savings accounts
Step 5: Have any leftover money? Pay down your student loans even more.
Once you have your retirement savings account set up, you can put any leftover money at the end of each month toward paying down your student loans. You can also apply any extra money you receive, like a tax return or bonus from work.
Other ways to save on your student loans
If you decide to start saving for retirement, it can be beneficial to reduce your monthly student loan payments. Here are some tips for navigating a lower minimum payment:
- Consider an income-driven repayment plan. For your federal student loans, you may be eligible for an income-driven repayment (IDR) plan that bases your monthly repayments on a percentage of your annual income.
- Apply for the Extended Repayment Plan. Another federal option would be the Extended Repayment Plan, which breaks up your repayments equally over 25 years, instead of the standard 10 years.
- Review your refinancing options. If you have private student loans, you may not qualify for an alternative repayment plan. In that case, consider refinancing your student loans for a lower interest rate or longer repayment term.
Compare student loan refinancing providers
Updated January 22nd, 2020
Bottom line
If you’re nearing retirement age or on track to qualify for loan forgiveness, you might want to prioritize saving up your nest egg. Though there are advantages to paying off your student loans first, especially if you have a cosigner or high interest rates. And there are also ways to put your extra money toward both.
Before you get started, take the time to compare student loan refinancing providers and retirement options to get the most bang for your buck.
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