Should You Be Putting More Money Into a 401(k) or Toward Student Loan Debt?

Woman working at home.
clownbusiness /

Life is all about making choices, and that’s especially true when it comes to making a monthly budget, no matter what your age.

Weigh In: Should We Forgive Student Debt? Take Our Poll
Read: What To Do If You Can’t Afford Your Student Loan Payments

In your 20s — and even into your 30s and beyond — that monthly budget could include student loan repayments. After all, 43.2 million Americans owe an average of $39,351 each — a total of $1.73 trillion, according to research organization

And if you find you have some room in your budget to pay more than the minimum payment due on your student loans, your instinct might tell you to accelerate your loans to pay them off faster. But is that the best budgetary choice to make?

Maybe not if it means ignoring your retirement savings. So what should be your priority — attacking your student loan payment or funding your 401(k)? Here are the pros of both.

More Decisions: Where To Put Your Money: Savings or Retirement?

Save for Your Future

Pros of Accelerating Student Loan Payments

You can speed up your student loan payoff by paying more than the minimum monthly payment, and you’ll reap some financial benefits:

  1. Your loan will be paid off sooner than you expected. An early loan payoff means you will be able to increase your emergency fund or start to save for big expenditures, such as a wedding or a house. Or you could then add to your retirement account.
  2. Your credit score will improve as your debt-to-income ratio goes down. That is beneficial if you want to obtain a mortgage, for example.
  3. You could save a significant amount of interest, especially if you have a large outstanding amount or private loans that carry higher interest rates than federally backed loans. Student loan calculators are readily available online and can give you an idea of your savings.

See: 9 Ways Student Debt Is Affecting Every Aspect of Americans’ Lives
Get Started: Make a Debt-Free Future Your Reality

Pros of Funding Your 401(k) Account

But what if you want to take that extra money and put it in a 401(k) account through your workplace? Here are some of the benefits:

  1. The earlier you start saving, the more time you have to accrue interest or invest the funds, and you won’t have to play catch up later on to make sure your retirement is adequately funded. Fidelity estimates you’ll need to save 15% of your annual income if you begin saving at 25, 18% at age 30 and 23% at 35.
  2. You can benefit from matching funds. Your employer might offer to match every dollar you contribute, up to a specified amount, such as 5% of your salary. If you earn $50,000 and put 5% into your 401(k), that’s $2,500 your employer will match per year. You can’t beat that.
  3. Money is contributed on a pretax basis, meaning you won’t pay taxes on that income in your filing year. That will save you money come tax time.
Save for Your Future

Read: What It Would Really Mean To Cancel Student Loan Debt

More To Consider

Paying off your student loans and saving for your retirement doesn’t have to be an either/or proposition. But it can be made easier by choices you make, including where to work.

A question to ask prospective employers, in addition to whether a 401(k) match is offered, is whether student loan repayment is part of the benefits package.

“The best bet for those starting out in their career is to work for an employer which recognizes and addresses the challenge of saving for retirement while paying back student loan debt by offering assistance with both. A growing number of employers are offering student loan repayment assistance as a financial wellness benefit,” said Patricia Roberts, the chief operating officer at Gift of College.

In fact, under the Internal Revenue Code, employers can offer up to $5,250 per employee per year in tax-free student loan repayment through Jan. 1, 2026, Roberts said.

More Help: 30 Ways To Dig Yourself Out of Debt

Final Thoughts

You must make at least your minimum student loan payment each month. If not, your credit score likely will be harmed. Even one payment that is 30 days late will negatively impact your FICO score since payment timeliness represents 35% of the score’s calculation. Late payments stay on your credit report for seven years, according to credit bureau Experian.

Save for Your Future

One factor to remember is that interest rates on federal student loans are relatively low. Over the past five years, undergraduate student loan interest has been 4.11%, said. For current undergrad loans, it’s even lower at 2.75%. The money invested in your 401(k) likely could earn more than 4.11% interest. So, if you use extra money in your budget on an extra student loan payment instead of investing it, you actually could lose money.

The decision to pay extra each month toward your student loan balance or put it into a 401(k) or other retirement account is a personal one. There is no one-size-fits-all approach, and your entire financial picture must be taken into account.

A financial advisor can help you to figure out what the right decision is for you and your financial goals.

More From GOBankingRates

Last updated: Oct. 22, 2021

Share this article:

Save for Your Future

About the Author

Jami Farkas holds a communications degree from California State University, Fullerton, and has worked as a reporter or editor at daily newspapers in all four corners of the United States. She brings to GOBankingRates experience as a sports editor, business editor, religion editor, digital editor — and more. With a passion for real estate, she passed the real estate licensing exam in her state and is still weighing whether to take the plunge into selling homes — or just writing about selling homes.
Learn More