Students often find themselves torn between saving for retirement and making progress on their student loans. Your specific situation will determine the best strategy for answering this question. Still, it is certainly possible to make progress toward eliminating student loan debt while setting yourself on a path toward a secure retirement.
Your debt situation must be evaluated before making an informed decision about which financial priority to give your attention to. Paying off student loans may not be your best financial decision. Paying off student loans and investing your finances are two options, but there are many things to consider before making a final decision. If you have debt from a federal student loan, you should also keep an eye on the Biden administration’s student loan forgiveness plan, which is currently in limbo.
Cash flow statements detail the inflow and outflow of funds for a given time frame. This idea applies to your financial situation. You can better manage your debt and investments if you have a good idea of how much disposable income you have after paying all your bills for a given time period. You should also ensure you have enough cash to cover unexpected costs and take advantage of other financial opportunities.
One could compare paying off student loans to investing: You may find it more beneficial to make only the minimum loan payment and instead put your money into investments if the interest rate on your loans is lower than the payback you expect to earn from your investments.
You should be aware that investment returns are not guaranteed. According to Vanguard, a balanced portfolio of stocks and bonds has historically returned 9.3 percent annually, on average.
Furthermore, you may be motivated to repay your private student loan with a fluctuating interest rate as quickly as possible to avoid a rate hike. In general, paying down debt is a good use of any spare cash you don’t intend to put elsewhere.
Saving for retirement can provide tax benefits that outweigh the interest costs of a student loan in some cases, and you can do this with a Roth IRA or a traditional 401(k).
Alternatively, you could deduct your student loan interest when you file your taxes. If you want to know if this is true for you and how it could affect your decision between paying off student loans and saving for retirement, consult a tax expert.
Suppose you have a high-interest rate on your student loans. In that case, your cash flow is tight, and your loans are a burden. If the debt burden prevents you from achieving other financial goals, like homeownership, then paying off your student loans should be a higher priority than saving more for retirement.
If you are confident that you will be able to make future payments on your debt and that your debt is not preventing you from achieving other financial goals, then you may invest in your retirement instead of paying off your student loans.
If you decide to put off paying off your student loans in favor of retirement savings, you should still pay them. Having outstanding student loan balances in retirement is not an ideal situation. If you have extra cash after making at least the minimum payment each month, you can put it toward debt reduction or savings.