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Should I save for retirement or pay down student loans?

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Does your employer offer matching funds for your retirement plan? If so, this is free money, so you should aim to max out this benefit.

 

The emotional burden of student loan debt

While the math might say you should invest as much as you can right now, that doesn't account for the reality of the daily emotional burden student debt can cause. If your student loan debt feels completely overwhelming, causes intense stress, or keeps you up at night, then it might make more sense to aggressively pay those loans off as quickly as possible.

Another consideration may be the size of your student loan balances. If you have $10,000 in debt left to repay, you might want to put your retirement savings on pause in order to throw everything you've got at that balance and repay it ASAP — especially if you can do it in a year or less.

 

Hidden costs of waiting to save

On the other hand, you probably don't want to entirely ignore what could be the biggest advantage you have for growing wealth: time. Time is a critical factor when it comes to investing, because time is what makes exponential compounding growth possible.3

The earlier you begin, the easier it will be to grow your assets over time. The longer you wait to invest, the more you will need to save each month in order to catch up. If you ignore the need to save for retirement while you pay down debt, you incur a big opportunity cost that can be difficult to make up for later. Opportunity cost4 is the benefits or earnings you miss out on when you choose one option over another — like skipping out on savings contributions while you focus on paying down debt.

 

A strategy to help you save and repay debt

You may need to work within the constraints of a tight budget — but that doesn't mean you have to make a binary choice when it comes to saving or repaying debt. It is possible to do both.

Aim to pay at least the amount you owe each month on your student loan debt. You don't want to fall behind on payments or pay less than what's due, as that will only serve to accelerate how much debt you accumulate. It can also negatively impact your credit score, making it harder to borrow money for a car or a home in the future.

Then, turn to your retirement plan — and remember your employer match. It may be small; it's common to see employers offer to match your contribution, up to 1% to 3% of your salary. That's free money to you. Can you contribute at least enough to your plan to secure this match? If so, set that contribution as a starting point.

Now you can evaluate what you have left over at the end of each month. If you feel you have more money you can contribute to either debt repayment or retirement, then you can decide what is best for your situation based on your goals and your preferences.

If you can't stand your debt, maybe that money goes toward paying off student loans as quickly as possible. On the other hand, if you have aggressive financial goals like early retirement, it may make more sense to bump up that retirement plan contribution so you can achieve your aims.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. J. B. Maverick, "What Is the Average Annual Return for the S&P 500?" Investopedia, updated February 19, 2020, accessed February 4, 2021. Back
  2. Wade Pfau, "Adjustments For A Conservative Return Assumption," Forbes, published April 1, 2020, accessed February 3, 2021. Back
  3. Tanza Loudenback, "A financial writer says the 'secret' to Warren Buffett's success is something everyone has," Business Insider, published December 27, 2020, accessed February 2, 2021. Back
  4. Jason Fernando, "What Is Opportunity Cost?" Investopedia, updated December 27, 2020, accessed February 2, 2021. Back