Should You Prioritize Student Loans or Saving for Retirement?
August 27, 2021

Should You Prioritize Student Loans or Saving for Retirement?

It is all too common for recent graduates to have significant debt after college. The average student loan debt is over $30,000. As tuition and other fees climb, that number is likely to increase every year. You probably already know that the longer you carry debt, the more interest you will pay. With that in mind, many students try to pay off their debt as quickly as possible, even if it means setting aside other financial goals, such as saving for retirement.

However, neglecting your retirement fund for too long can have adverse effects. What is best, though: saving or reducing debt? An easy answer would be to do both as best as possible, but it depends on your student loan’s interest rate. If you find yourself struggling to pay back private student loans, consider contacting the debt attorneys at McCarthy Law. They may be able to reach a debt settlement and assist you in creating a plan to save for retirement and pay off student loans.

Benefits to Paying Off Student Loans Early

Paying off your student loans has its benefits. Say you graduate college with $30,000 in debt at an 8% interest rate over 10 years. If you add $200 at the start of your monthly payments, you might be able to pay off the debt in five years instead of 10. You could be saving more than $6,000 in interest. You can then put that money toward your retirement fund.

Furthermore, if you wait to pay off student loans, you run the risk of missing payments. You may have fallen on hard times, or there was a string of unexpected bills that consumed your income. When you cannot pay your monthly payments on time, you damage your credit score. There is also a peace of mind aspect to consider, as well. Not having student loan payments hanging over your head will likely do more for your mental health.

Why You Should Save for Retirement

Many people make the mistake of assuming that Social Security will cover senior living expenses, but it will only provide about half of what you will need. You will have to cover the other half, so having a retirement savings account is beneficial. The more time you build your savings, the longer you can take advantage of compounding. Compounding is earning interest on interest and how you can turn a series of modest contributions to an IRA or 401(k) into a large amount over time.

For example, you put away $300 a month over 40 years, with a 7% return. You will be saving $144,000, but you will end up with $719,000. That is a $575,000 gain through compounding. Now, say you spent 10 years paying off your student loans, and you put $300 away over 30 years. At that point, you will only have $340,000 in your account, with a gain of $232,000. That is still impressive, but you could have a lot more by prioritizing your retirement savings.

Look at Your Interest Rates When Deciding

If you are trying to determine whether you should prioritize your student loan debt or build a nest for retirement, one factor you should consider is your loan’s interest rate. Fortunately, most federal loans are at a fixed interest rate. For example, Direct Subsidized Loans between July 2019 and July 2019 has a rate of 5.05%. Similarly, Perkins loans have a rate of 5%, regardless of when you received them. Ultimately, if your interest rate is low, it is a good idea to pay less toward your loans and put more into retirement.

Conversely, private student loans typically have an interest rate similar to credit cards –– around 25%. If this is the case, it will be wise to pay off your loans as quickly as possible. However, you should still make smaller contributions to your 401(k) or IRA whenever you can.

How to Balance Student Loans and Retirement Savings

Of course, you should aim to strike a balance between paying off loan debt and saving for your retirement. If you consistently have extra money, you should contribute some of it toward a savings account. You can also cut down on expenses to free up some funds toward loan payments. This could mean canceling cable or limiting how often you eat out. You may also want to pick up a part-time job at night and on weekends. If you can free up enough money or earn extra income, you can strike a nice balance between chipping away at loans and saving for retirement.

Contact the Skilled Debt Attorneys at McCarthy Law

If your student loan debts keep adding up, consider contacting the debt attorneys at McCarthy Law. We work with private loan lenders to reduce interest and how much the borrower owes. At the end of a successful negotiation, you end up only paying a fraction of the original cost. To learn more about our services, call (855) 976-5777 or complete our contact form to schedule a free consultation.

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