Gen Zers Are Paying Student Loans Before Saving For Retirement — Is This a Good Strategy?
Written by
Josephine Nesbit
Edited by
Nicholas Morine
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Federal student loan borrowers began paying their monthly student loan bills on Oct. 1. This includes roughly 44 million Americans, noted CBS News, which could put a big financial strain on many households after a pause of three and a half years. While every generation is affected, Gen Z borrowers say their retirement savings may have to take a back seat as payments resume.
But is that a good idea?
Most Gen Zers struggle to make ends meet, but 66% have already started saving for retirement, reported Insider Intelligence, with an estimated median of $29,000 stashed away. Eighty-four percent of all higher education borrowers say student loans have impacted their ability to save for retirement, and 28% of zoomers have taken out hardship withdrawals from retirement accounts — the highest of all generations.
But you still need to make the minimum payment when you have outstanding student loan debt. If you don’t, you risk default, which could hurt your credit score and possibly lead to higher monthly payments and interest rates. However, this doesn’t mean you shouldn’t contribute toward an IRA or 401(k) retirement plan.
If you have an employer-sponsored 401(k) — or 403(b) or 457(b) — you’ll want to contribute as much as you can to get the employer match. Not contributing enough to get the match is essentially turning down free money.
The SECURE 2.0 Act, a new law passed in Dec. 2022, has also made it easier for workers to save for retirement while paying off their student loans. Under this new law, employers can match a worker’s student loan payment with a retirement account contribution.
“And this is really good news for, particularly, younger employees, who… their household budgets are stretched, they’re gonna have to dip into their household budget now to start paying off the student loans, the notion of saving for retirement, it’s really hard to do,” Chris Farrell, Marketplace’s senior economics contributor, said in an interview with Marketplace Morning Report.
Most of the gain in a retirement savings plan comes from the employer’s match, said Farrell. Starting in 2024, this new law allows student loan borrowers to pay off student loans and save for retirement simultaneously.
More From GOBankingRates
