The Priority Game: Pay Student Loans or Save for Retirement?

In this article: Choosing between paying for student loans or saving for retirement can be overwhelming. Learn how to navigate this complex decision.

Published Sept. 16, 2020

Reading Time: 3 minutes.

For many Americans, managing financial priorities can be aggravating. With a record 45 million people striving to pay off student loans, the pressure to prioritize financial goals is mounting. Studies show it takes an average of 21 years to pay off student loans. Thus, thinking about long-term goals, like saving for retirement, can seem unreachable. When choosing between paying student loans or saving for retirement the answer, as is usually the case, is “it depends.” 

Should I Pay Off Student Loans Before Saving for Retirement?

It might feel like a good idea to pay off student loans as quickly as possible, but other goals might be higher priorities. For instance, having a solid emergency fund should come first. Focusing on growing the retirement nest egg as early as possible is paramount. The earlier you begin saving, the more you will be able to accumulate over time. This is why financial advisors recommend paying off student loans and saving for retirement in tandem.

Is Paying off Student Loans Early Worth It?

At a glance, there are many benefits to paying student loans quickly. An overwhelming 60% of millennials define financial success as being debt-free. Not having debt hanging over your head can be empowering, alongside reducing interest accrual. If opting for this approach make sure to set regular payments of more than the minimum and allocate all of your extra income to this goal.

 A key consideration here is how high the student loan interest rate is. If it is high relative to where current interest rates are, you may be better off paying them off ahead of schedule rather than investing. By avoiding paying high-interest rates, they are essentially locking savings that they can, in turn, put towards long-term goals such as retirement. That said, if the interest rate in student loans is low, it may be more beneficial to continue to pay off loans in the original timeline. Ultimately, regardless of the interest rate in the loan, it depends on your unique financial situation

Is it Better to Pay Off School Loans or Invest?

An estimated 56% of Americans between the ages of 18 and 29 put off saving for retirement to pay off their student loans. It is likely a prime moment to start investing for retirement if currently paying off loans. For example, by focusing only on paying off loans, you might miss out on allowing your savings to grow over time and a potential 401(k) employer match. An optimal choice is to spread out student loan payments to start the retirement saving journey. 

Can Student Loans be Forgiven?

Under certain circumstances, student loans can be forgiven, canceled, or discharged. This means the individual is no longer required to pay off some or all of the loans. These only apply for federal student loans. The HEROES Act of 2020, however, provides $10,000 in federal and private student loan forgiveness for economically distressed borrowers as a result of the Covid-19 pandemic. 

The most common is the Public Service Loan Forgiveness (PSLF) program. It eliminates the remaining balance on Direct Loans if the individual has made 120 qualifying payments under qualifying repayment plans and works full-time for a qualifying employer. These are qualifying not-for-profit organizations. These are government organizations at the federal, state, local, or tribal level; 501(c)(3) not-for-profit organizations that are tax-exempt; or other types of not-for-profit organizations that provide certain types of qualifying public services but are not tax-exempt. 

Pay for Student Loans And Save For Retirement

As you save for retirement and pay off student loans, you can also make progress towards other significant financial goals. Think about paying off high-interest debt, creating or revisiting an emergency fund, and also saving for unexpected expenses. Identify what other financial goals are worth pursuing and put together a plan to get there. A fiduciary financial advisor can be helpful when putting together a holistic financial plan that can realistically allow meeting both goals.

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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