How To Save for Retirement While Paying Off Student Loans
Written by
Vance Cariaga
Edited by
Daria Uhlig
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The upcoming resumption of federal student loan payments following a pause of more than three years means millions of Americans will have to make some hard choices about how to budget their money. In some cases, borrowers plan to take extreme measures to pay off student debt — like using credit cards to pay it, taking on roommates or tapping into retirement savings.
A new survey from financial services company Empower found that more than four in 10 borrowers (42%) plan to curtail retirement savings to help pay off student loans. While this might be the only option for cash-strapped Americans, financial experts strongly advise against it.
Saving for retirement is one of the most important financial moves you will ever make — and avoiding it can lead to severe money problems during your senior years, when you can least afford them.
There are strategies that will let you save for retirement even as you begin paying down student loans again. Follow these tips to help protect your nest egg.
Pay the Minimum
One thing you don’t want to do is miss any student loan payments, because you’ll face late fees and a hit to your credit score. But that doesn’t mean you need to overextend yourself if you are on a tight budget. Charles Schwab recommends making at least the minimum payment on every loan, which could free up more money to put into retirement savings.
Max Out Your 401(k)
Making the maximum contribution to your 401(k) account is always a smart money move — especially if your employer offers matching contributions. Not only will your money grow fax-free with a 401(k), but matching contributions amount to free money. If the resumption of student loan payments tightens your budget, figure out other areas to cut back on so you can protect your retirement savings.
Automate Your Student Loan Payments and Retirement Contributions
Another smart money move is to have student debt and retirement contributions automatically deducted from your bank account each month. As Forbes reported, automating debt payments and retirement contributions lets you focus on what to do with the rest of your budget instead of stressing over how to divide up every paycheck. If your financial circumstances change, you can always increase or decrease your automated payments.
Consider Refinancing
One way to lower your student debt payment — and free up more money for retirement savings — is to refinance your federal loan with a private lender. This doesn’t necessarily work for everyone, but if you have good credit, you might get a lower rate if you refinance. You also might qualify for interest-rate discounts when refinancing.
Research IDR Plans
As previously reported by GOBankingRates, the U.S. Department of Education recently launched a beta website for the Biden administration’s new income-driven repayment (IDR) plan, called the Saving on a Valuable Education (SAVE) Plan. The SAVE Plan is the most affordable student loan repayment plan ever created. It will eliminate monthly payments for low-income borrowers, save other borrowers at least $1,000 a year on payments and ensure borrowers don’t see their balances grow from unpaid interest.
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