Student Loan vs. Retirement: Which Should You Pay Off First?

student loan v retirement

Student Loan vs. Retirement

Have you ever wondered if you should pay off your student loans or start saving for retirement first? This can be a tempting proposition; after all, you are eliminating some of your debt. Before you start making major financial decisions, make sure you read this article.

For many Americans, student loans are as much a requirement for obtaining a four-year college degree as decent SAT scores. With all of the scare stories in the media about the crushing burden of student debt and the consequences of stretching repayment, young graduates may be tempted to postpone buying a home and saving for retirement to pay off those student loans faster.


Why You Shouldn’t – The Stats and Studies Don’t Lie

Recent modeling done by think tank Demos shows that postponing or reducing retirement savings rates, especially early in your career, could cost you big when it comes time to retire. The reason is the simple one you already know about: The impact of time and the power of compound interest in increasing the value of assets. The longer you hold an asset that’s appreciating — even a simple money market account — the more it will be worth. And when it comes to retirement, making up for slim savings early in your career by saving more later can be very difficult because of the shorter time your assets have to appreciate.

Demos researchers projected the lifetime savings activity of two households. Each was dual-income with two college graduates. Each bought a home, saved for retirement and eventually used some savings to help their own children with college. The model used actual consumer saving and lifestyle data to model how each household was likely to behave, including when they bought a house, how much the house was worth, how much they put down, how much they saved and their average incomes over time.

The only difference was that one household had average student loan debt and the other did not. Over the course of their careers, the indebted household actually started with somewhat higher earnings than the debt-free household. However, the household without student loan debt began saving for retirement earlier and were able to buy a slightly more expensive home.

While both households ended with more than $1,000,000 in net assets at age 65, the amount the household without student loans saved and invested in a bigger home resulted in an additional $207,000 in a retirement account.

A similar analysis by the New York Times found the gap to be even larger: At age 65 its debt-free household had $1,829,571 in retirement savings; $396,039 more than the $1,433,532 saved by the household that started out with student loans.

So how can the 65 percent of college graduates who had to borrow to pay for their degrees catch up to their debt-free cohorts?

For Americans stuck in an economy where real wages in constant dollars have stalled for most, the notion that a rise in income later in your career will fuel a healthy retirement no longer works. As these studies show, it’s imperative to start saving even while paying down student loans. The competition for your salary dollars — for debt service, savings, home purchase, children and some modest increase in standard of living — is fierce. One way to make sure you do right by your retirement account is to enroll your student loans and your mortgage in a biweekly repayment program like AutoPayPlus. It will give you the discipline to make sure those items are taken care of while repaying the debts more quickly, and saving money that you can then add to your retirement account.

Your professors may not have covered that strategy in any of your college courses, but you went to school to do the smart thing. Now you know what it is.  Try our savings calculators to estimate what you can save on your loans.

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