Should You Save for Retirement or Pay Off Student Loans?

Every year, millions of college graduates join the workforce while Boomers begin to transition into retirement. Landing that first post-grad job is a pivotal milestone for all students, but unlike their predecessors, many in the younger generations are tackling a dilemma few others have faced: Save for retirement or pay off student loans?  

When the first Boomers reached college age in 1964, annual tuition for a full-time student at a four-year public institution averaged about $2,000 in today’s dollars.¹ For the 2019-2020 school year, annual tuition at a four-year public institution averaged about $9,425 and continues to increase every year.² As a result, students in younger generations have resorted to loans, with more than 6 in 10 (62%) of graduating seniors from public and non-profit colleges averaging about $28,950 in student loan debt.³

If you’re trying to repay student loan debt, it’s tempting to postpone saving for less immediate needs such as emergency savings, retirement and even marriage. In fact, among college graduates with student loans, 34% have delayed emergency savings, 23% have delayed buying a home, 29% have delayed retirement savings and 9% have delayed getting married.⁴

This is a problem. When you delay saving, you miss out on the benefits of compounding during those years. Even small amounts can add up to significant accumulated earnings by the time you’re 65.

You shouldn’t have to choose one over the other. With careful planning, you can develop a strategy to tackle student debt while also saving for retirement. Consider the following steps:

1. First, make the minimum loan payments.

The cardinal rule of student loan repayment is: don’t miss payments. Make sure you’re making the minimum payment on every loan and that the amount is manageable within your monthly budget. If it’s not, the Consumer Financial Protection Bureau has resources that describe how you can renegotiate your loan with federal and private lenders.

The important thing is to address the problem quickly. As you repay your loan, you’re establishing your credit history, and your student loan interest payments may be tax-deductible if your adjusted gross income is less than $85,000. So, there’s an upside to making minimum payments on time.

2. Next, if there’s money left over, take advantage of your company’s 401(k) match.

Your next priority is to consider retirement savings. Look into your employer’s 401(k) plan—or any similar qualified workplace retirement plan. Some employers match 50 cents to the dollar for every dollar you contribute, up to a certain limit (often 5 or 6 percent of your salary). This “free money” can add up and have a significant impact over time, so if your employer does offer matching contributions, make sure to contribute enough to get the match.

3. No workplace retirement plan? Consider opening up a Roth or traditional IRA.

Even if your employer doesn’t offer a retirement plan, you can still make tax-advantaged contributions to a retirement account. In 2021, you can save up to $6,000 a year in a traditional IRA and get an up-front tax deduction. Alternatively, you can save the same amount in a Roth IRA and forgo the tax deduction today, but enjoy potential tax-deferred growth and tax-free withdrawals on qualified distributions in the future.⁵

Also, if your income is less than $66,000 as a joint filer or less than $33,000 as a single filer you might be eligible for a credit for your retirement savings contributions to a 401(k) or an IRA of up to $1,000 ($2,000 if married filing jointly) from the IRS through the Saver's Credit.

4. Put additional funds against your highest-interest-rate loan.

If you have multiple student loans—and assuming no other high-cost, nondeductible debt (such as credit card debt, which should be paid off first, or an emergency fund)—focus any extra money on the loan charging the most interest. If you’re fortunate enough to have only one low-interest loan, consider making the minimum payment while investing in the market.

While investing involves risks and you could lose money in the market, you may also gain more from investment returns over the long run than you’ll pay in interest.

5. Use windfalls wisely.

Windfalls can be exciting, but they should be managed carefully. If you should get a windfall, whether in the form of a gift, bonus or inheritance, take the time to weigh your options. You could use the money to reduce your student debt and save for the future.

The bottom line

Juggling student debt can be tricky, but investing in your future is worth it. College graduates can successfully manage loan repayment while saving for retirement.

¹Based on 1964-65 school year, and expressed in constant dollars as of the 2018-19 school year (in other words, the value expressed in dollars adjusted for changes in purchasing power since 1964). Constant dollars based on the Consumer Price Index, prepared by the Bureau of Labor Statistics, U.S. Department of Labor, adjusted to a school-year basis. For public institutions, in-state tuition and required fees are used. U.S. Department of Education, National Center for Education Statistics, prepared December 2019.”

²U.S. Department of Education.

³The Institute for College Access & Success, “Student Debt and the Class of 2019,” as of October 2020.

⁴Bankrate, as of 02/27/2019.

⁵You need to be over the age of 59 ½ and have held the account for 5 years before tax free withdrawals are permitted.

Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (1222-2NLK)