The Millennial Conundrum: Save for Retirement or Pay Off Student Loans?

August 17, 2018

Millennials—the generation of Americans born between 1982 and 2000—now outnumber Baby Boomers.1 And while Boomers are beginning to transition into retirement, many in the younger generation are tackling a dilemma few before them had to face: 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 $1,924 in today’s dollars. By the time the first Millennials turned 18 in 2000, that average was $4,698—and it has risen further since.2With the increase in college tuition, many Millennials have resorted to loans. In 2016, 69% of seniors graduating from public or non-profit colleges had student loans, averaging about $28,950.3

If you’re trying to repay student loan debt, it’s tempting to postpone saving for less immediate needs such as retirement. Indeed, an estimated 56% of Americans between ages 18 and 29 postpone retirement saving because of student loans.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, Millennials—and anyone else, for that matter—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 long as you’re repaying 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 $80,000. So there’s an upside to making minimum payments.

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 fund. You can save up to $5,500 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.

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)—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 when they come along 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.



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