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Student Loans vs. Saving for Retirement: Which Comes First?

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We’ve all heard the numbers about student loan debt. Recent reports peg the outstanding student loan balances that Americans carry at $1.7 trillion. That’s an overwhelming number. If you’re sitting with $30,000 or more in debt, it’s easy to feel like your student loans will never be paid off, stifling any opportunity for financial freedom.

That’s especially true if you’re also trying to save for retirement at the same time. We all hear about the need to start saving as soon as possible, but it’s hard to know which goal should come first – paying off student loans or saving for retirement.

The answer to this dilemma lies in having a rational and logical outlook on the situation as a whole.

It’s a Numbers Game

Debt, on nearly every level, is better gone than on your financial plate. Student loan debt is no different and the desire to get rid of it as soon as possible is an admirable sentiment. Let’s look at why, in this case, the numbers show that it’s not your best bet:

Many student loans are charging five percent or lower and the stock market, on average, is argued to return 7 to 8 percent. The difference becomes even more striking when you have a 401(k) match available to you through an employer, as such an arrangement means that you get a 100 percent return on your money. Simply put, the numbers show that putting saving for retirement ahead of paying off student loan debt is the wisest option.

Long Term Impact

The desire to be free of student loan debt is understandable, especially if you have a higher than average balance. However, focusing all your energy on student loans while sidelining retirement savings can open you up to long-term risk.

Retirement might seem like it’s so far away. That’s because it is. You may be looking to retire in 30 or 40 years, which can be hard to wrap your mind around.

That attitude overlooks the power of compound interest. Compound interest is the interest you earn on interest. Or, for the sake of investing, it’s your money making more money for you through growth and reinvested dividends.

For compound interest to work most effectively, it needs time, as time allows your money to grow exponentially. Even if you put off investing for retirement by a few years because of student loans, you’re leaving money on the table.

Both Can Be Done

Student loans vs. retirement shouldn’t be an either/or question as both can be done if you manage your activity wisely. It might seem impossible to do both at the same time, and paying off debt carries emotional victories that saving for retirement doesn’t – but it is possible. In fact, there are benefits to doing both.

Not only is student loan interest generally tax-deductible but getting a 401(k) match lowers your tax responsibility. Certain tax credits are even available to those who save for retirement and fall under certain income limits.

If doing both seems impossible to you, consider consolidating your loans to get a lower rate or putting them on auto-pay to get an even further reduced rate. Pay your minimum requirement and then look to get your 401(k) match. If you do not have a 401(k) available, you can still invest in small amounts through certain online brokerages. It can be tempting to give up on one or the other, especially with investing, but look for other things to cut from your budget first, like discretionary spending or other monthly expenses. The point is: if you maintain the right perspective, you can maximize your contribution to both your retirement and your student loan payments.

The overwhelming weight of significant outstanding student loan debt can make it easy to delay other financial goals, like saving for retirement. But a look at the numbers reveals that it doesn’t need to be an either/or scenario but a both/and opportunity.

Are you focusing on saving for retirement or paying off student loans? Share your experience in the comments below or catch up with us on Facebook.

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