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Does Saving for Retirement Come Before Student Loans?

Education debt is skyrocketing as grads are increasingly relying on loans to finance their education. On average, students are leaving school with roughly $30,000 in debt, which doesn’t include other liabilities like credit cards or car loans. The burden has become so great for some young adults that it’s led them to put financial goals like buying a home or saving for retirement on hold. Here are some things to consider when you’re weighing the value of saving against getting rid of student loan debt.

What’s the Cost? 

All student loans require you to pay some amount of interest, although federal loans typically come with a much lower rate than private loans. The first thing borrowers should look at when mapping out their payoff strategy is how much they’re paying in interest. If you’ve got a private loan with an interest rate that’s eight or nine percent, accelerating your payoff can yield some serious savings.

You want to compare the amount you’re paying in interest versus what you stand to earn from your investments. Even if the returns you anticipate are only a percentage point or two higher than the interest on your loans, you’re still going to come out ahead. Unless you’re just absolutely adamant about being debt-free, putting off your retirement savings is effectively costing you in the form of unrealized gains.

Find out: Can I afford my student loan payments?

Meet Your Match

If you’ve locked down a full-time job that offers a 401(k) or similar retirement plan, you have an opportunity to snag some free money in the form of matching contributions. Depending on your employer, the match could be good for up to six percent of your income, so unless you’re extremely strapped for cash, it doesn’t make sense not to contribute. The other advantage of chipping in to your employer’s plan is that it lowers your taxable income, which may mean a bigger refund or a lower tax bill next April.

The Penalty for Waiting to Save

Students who are thinking of putting their debt payoff ahead of retirement need to take a hard look at their time frame. If getting rid of the debt is going to delay your savings for five or even 10 years, it’s going to have a significant impact on the size of your nest egg. The longer you wait to save, the less time your money has to grow, and it’s extremely difficult to try to catch up later on.

Doing some simple math can illustrate how much you stand to lose out on by deferring your savings. Let’s assume you land a great job out of school and you’re able to save $5,500 a year in an IRA. A six-percent annual return would see your savings grow to more than $1 million by age 65. Now, let’s say you wait until you’re 32 to start saving: you’d have to up your annual contributions to $11,000 to have roughly the same amount saved by the time you retire.

How to Do Both

Although challenging for some, it’s still possible to save for retirement while dealing with student loan debt. Taking advantage of your employer’s plan is probably the easiest way to save, but if that’s not an option, you can still get a head start by opening a traditional or Roth IRA. Putting in even $50 a month is a small but important step in the right direction.

Applying tax refunds, bonuses from work or other cash windfalls to your student loans can bring the balance down more quickly, and you’ll save some money on interest along the way. If you work in a specialized field, such as nursing or education, there are also forgiveness programs available that can eliminate a portion of the debt. When you get a raise at work, don’t fall into the trap of spending the extra money. Instead, divide it between your loan payments and retirement contributions to get the most out of every dollar.

While it’s certainly to your advantage to say goodbye to student loan debt as quickly as possible, forgoing your retirement savings in the process can have some potentially negative financial consequences for your future. Running the numbers and evaluating your goals can help you strike the right balance between building your retirement savings and wiping out those pesky loans.

Photo credit: flickr

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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