Paying student loans vs. saving for retirement

February 17th, 2015 Mark Sandvig

What should you do? Pay off your student loans so you can feel like you’ve successfully escaped a large financial boulder from crushing you? Or, use a portion of your paycheck to live more comfortably, many years from now? Either way, you’re putting your money towards something you cannot see. You see money going out, but it’s challenging to understand the full-effect of the return on your investment. And, you want to choose the option that will benefit you the most.

A lot of people become overwhelmed thinking about which option they should choose. They simply don’t want to make a mistake with their money. They become indecisive and end up choosing to take the action they believe is safest…no action at all.

Let’s explore both sides of the issue.

Paying off student loans

The amount of debt student loan borrowers accrue continues to escalate. According to, in 2012 the average undergraduate borrower in the U.S. had $27,183 in student loan debt. And, that’s only if they go to school for four years. For those who take six years to receive their degree, the amount of student loan debt can almost double, according to Temple University president, Neil Theobald.

Student loan debt can remain with many people throughout their lives, if they don’t make it a priority to take care of it early on. In the U.S., borrowers older than 60 owe more than $43 billion in student loan debt, as stated by the Federal Reserve Bank of New York.

People with student loan debt should do their best to make the monthly required payments on their loans. The Department of Education projects that 25.3 percent of undergraduates who receive a Stafford loan will default during the repayment period of the loan. The penalties for missing a payment are harsh and will only add to the amount already owed. That’s why it’s important to find a way to make payments on your loan, even if it is only the minimum.

Saving for retirement

Saving for retirement is something a lot of people put off, thinking they can make up the difference later in life, which rarely happens. Most people focus on the here and now. This is a costly mistake. Saving for retirement often becomes more challenging as people age. Why? Because life happens. Whether it’s starting a new family, maintaining a home, developing a costly medical condition, or other unexpected occurrences, these events are where a lot of people’s money is spent.

The Federal Reserve has found that 31 percent of non-retired workers claim they have no retirement savings or no pension. The news is a little more concerning for the younger generation. Merrill Edge reports 51 percent of millennials (people between the ages of 18 and 35), who earn $50,000 – $250,000 annually, have no retirement savings. And, 35 percent of those people believe they will be able to save for retirement, in 2015. The percentage is likely to be much lower for those who were below the threshold of the survey.

Put something towards your retirement. Anything. If you’re only putting $20 a month towards your retirement, at least that money can work towards earning interest which will make a big difference in the future. Ideally, people in their 20s should be putting close to 10 percent of their income towards retirement. This will allow them to breathe a little easier, later in life. Unfortunately, a lot of people in their 40s and 50s are scrambling to create a comfortable retirement because they’ve put it off for so long. This is a big mountain to climb. But, it’s never too late! While it may be challenging to save when you’re older, you can always contribute towards your retirement, which you’ll be thankful for in the long run.

So, what should you do?

The question is not about whether making payments on student loans or saving for retirement is more important. You should be asking yourself how can you make both a priority and how can you find ways to contribute to both? They are equally important. But, it’s better to invest in your future, now. Make at least the minimum monthly payment on your student loans to help you pay it off, which will give you the opportunity to use more of your money sooner, and also contribute to your retirement. Putting money towards your retirement builds a nice cushion for your finances later in life, which offers more stability and comfort.

If you have an employer who has a matching contribution retirement plan, you should do your best to match their contribution. On average, an employer is likely to match 50 cents for every dollar contributed towards a 401(k) plan, up to 6 percent. This means the maximum amount would be around 3 percent of your pay. When you get a raise at work, it’s recommended that you consider placing some of that extra money towards your retirement, before putting it towards your student loans.

Sorting out money matters may seem like a mountainous obstacle. Like anything else, it takes practice, and trial and error, to find the right balance for you and get it right. The most important thing is to get started preparing, now, so you can enjoy so much more, later.

About the author

Mark Sandvig is Mortgage Banking Officer at MidWestOne Bank. NMLS number: 641615

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