My story: Should I pay off student debt or invest in my 401(k)?

Young woman contemplates student loans.

Is there a right answer? One college graduate explores this issue.

I graduated from college with a job, an apartment, and a car. The responsibilities of being an adult came at me fast. Saving money for retirement was the last thing on my mind. But luckily, my job at the time offered workshops on how to save for the future. While that information was helpful, I still didn’t understand how to simultaneously save for retirement and pay off my biggest debt: my student loans.

As of December 7, 2018, student debt reached a record $1.5 trillion, according to the Federal Reserve. I was happy to have my degree but having $33,000 in debt looming over my head created a sense of urgency. I knew I needed to come up with a plan that allowed me to save for retirement and successfully pay off my student loans.

Here are some things I considered.

Which should you prioritize: loans or retirement?

Jon Graff, participant services director of Wells Fargo Institutional Retirement and Trust, says that while paying off loans and saving for retirement are both necessary, creating a balance will look different for everyone. They’re both equally important, but whether you put more of your salary toward paying off your student loan debt or toward retirement savings depends on a few things.

Tip 1: Prioritize by rates

Consider the interest rate on your student loan when determining how to pay your loan off. Simply put, the higher your interest rate, the faster you want to pay off your debt, since you will pay more in interest over time.

In addition, if the after-tax interest rate on your student loans is higher than the expected return on your retirement savings, you may want to pay more attention to paying off debt. Considering your rates all around can help you prioritize effectively.

But if your student loan interest rate is low, you may not be in a huge rush to pay it off. And if you have the option of a flexible student loan payment, Graff suggests putting more aside for retirement. “It could make sense to save some in a retirement plan, especially if your loan interest rate is on the low side.”

Tip 2: Consider employer match

One reason to prioritize 401(k) saving over your debt is to take advantage of an employer match. “If the match is 25%, 50%, or 100% of what you save, think of it as an annual return on those savings,” says Graff. “Everyone is looking for investments with that kind of annual return the first year.” Not contributing enough to get your employer match on your 401(k) is essentially like leaving money on the table. That’s “free money” that will help you see a larger return, faster.

College students who graduate with student loan debt have about 50% less in retirement plan assets by the time they reach 30 compared to those who have no loans, according to June 2018 research from the Center for Retirement Research at Boston College. Although retirement may seem like a long way off, it’s important to prioritize saving for retirement when you’re young, even if you have other debts to pay.

No workplace retirement plan? Think about opening up a Roth or traditional IRA account with your bank. With either account, you’ll still be able to make tax-advantaged contributions to a retirement fund.

Tip 3: Customize your strategy

There’s no one perfect strategy for paying off student loan debt and saving for retirement. The important thing is to take stock of where you are now and come up with a plan that makes sense for your overall financial situation. Come up with a plan and be informed. Take time to go over where you stand at least once or twice a year to make sure you’re on track.

As for me, after reading success stories about how other new grads had formalized a strategy to help them pay back loans and still save money, I felt encouraged. Some people subscribed to radical saving methods, others took advantage of the resources from employers. What I learned is that creating a balance between saving and paying off student debt will look different for everyone — but they’re both equally important.

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