Balancing educational debt with financial planning – part 1

June 24, 2022


Seven tips for repaying your student loan without kissing your retirement fund goodbye.

If you’re out of college and still paying off your student loans, you have company—and plenty of it. Most recent alumni (62%) from four-year colleges have student debt. For the Class of 2019, the average student graduated owing $28,950 in loan repayments.1 And most of those recent graduates aren’t going to be debt-free any time soon. It takes graduates 20 years, on average, to pay off their student loans.2

The picture only gets more challenging for graduates with student debt: The burden of paying back those loans with interest can make it tougher to meet other financial obligations and goals, such as saving for retirement. Finding the right balance can be tricky but this two-part blog series can help. First, let’s talk about paying off your own student debt. 

You’ve just graduated or you’re a few years out of school, you have a lot of student debt to repay—and you’re hearing you should start saving for retirement, or for a down payment on a home, or an emergency fund, or… The list goes on.

Should you get rid of that mountain of debt first or start saving for retirement (and any number of those other goals) at the same time you pay down your loans? Most financial professionals, most of the time, would recommend the latter: begin to tackle both sets of challenges now, even if your income is modest.

Paying down student debt is crucial. It’s a legal obligation and doing so will avoid costly penalties. In addition, it will keep your credit rating high and the cost of future borrowing low, and interest may be tax-deductible. Making student loan repayment part of a broader financial plan with regular savings is also crucial, because you can benefit from the tremendous power of compound interest.

Here’s an example: If you wait until age 40 to start funding your retirement with investments of $100 per month, you’ll have $70,000 by age 65, assuming a 6% annual rate of return. But if you start making that same monthly investment when you’re 18, you’ll find $307,000 in your pot—more than four times as much—at age 65.3

Are there any instances when you should tackle the student loans first and only later start saving for retirement? Sure. For example, if your loans are at particularly high interest rates, say 6% or more, it pays to focus on the loans first. That’s because you’re likely accruing more in interest debt than you’ll make on retirement investments.

So how do you go about paying down the loan while paying into your retirement, particularly if you’re on a tight budget? Here are some tips:

1. Pay just the monthly minimums on your student debt. As your career progresses and your salary increases, you can consider faster paybacks.

2. Put as much as you can into a 401(k) or 403(b). Not only is it a good, easy way to save for retirement, but most employers will match your contributions, to a specified limit. Put in enough to maximize the match if you can. It’s all “free” money.

3. No 401(k)? No problem. If your employer doesn’t offer a retirement plan, open a traditional or Roth IRA.

4. Take advantage of employer repayment benefits. Some employers make payments toward their workers’ student loan debts. Until 2025, these payments can be tax-free.

5.  If you have several student loans, speed up your repayments on the loan or loans with the highest interest rate.

6. Choose a loan repayment option that works best for you. Federal loans come with repayment options. The standard option has a 10-year payback period. But an income-based repayment plan may work out better for you, allowing you to stretch out payments, based on your income, for 20 or 25 years, with the rest of the loan, if any, forgiven at end of the repayment period. If you have several federal loans, a government consolidation plan could reduce your monthly interest payments.

7. Consider refinancing a private loan. You have fewer repayment options with private loans. One option, in many cases, is to refinance your private loan to get a lower interest rate.

It isn’t easy to pay down student debt while also saving and investing for your retirement. But it is possible. And it’s crucial to your overall financial planning and health.  

1. "Student Debt and the Class of 2019", The Institute for College Access & Success, October 2020.

2. "Average Time to Repay Student Loans", Melanie Hnason - Educationa Data Initiattive, December 2021.

3. "If I have student loans to pay off, should I also save for retirement? Here's what experts say", Hecht, Anne - CNBC, December 2019.

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