Pay Off Student Loans or Save for Retirement? How You Can Do Both
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Pay Off Student Loans or Save for Retirement? How You Can Do Both

  • The Millennial’s guide to both paying off your student loans and saving for retirement every month.
  • Make your minimum payments.
  • Pay off your highest interest rate loans first.
  • Understand your 401(k).
  • Why you should maybe consider refinancing your student loans.

If you’re a Millennial, you have a lot of financial tradeoffs to consider as you move forward in your career. Should you tough out an expensive lifestyle in big cities like New York or San Francisco, or is there career potential in more affordable suburbs? Can you afford to take a low-paying passion job, or should you work for a higher salary until you feel more financially stable? And the real kicker… should you put every single extra dollar you earn toward paying off student loans — or split your earnings between saving for retirement and paying off your loans?

While some of those questions can’t be answered by crunching the numbers alone, the good news for that last one is that your answer is pretty straightforward once you’ve looked at your financial picture. So if you’re trying to juggle debt and saving for retirement, follow these 6 tips and you’ll be able to prioritize your hard-earned funds like a pro:

1. Always Make Your Minimum Payments.

Your highest priority is always to make your minimum payments — no matter what. It’s not worth going into deferral or forbearance on your loans for the purpose of contributing to a retirement account. However, once you’re in a stable situation and able to make your minimum payments, plus normal expenses (rent, transportation, food, etc.), then it’s time to figure out how to allocate the rest of your funds.

2. Figure Out Your Interest Rate(s).

This may seem obvious, but it can get complicated if you have multiple loans and/or multiple servicers. Take stock of how much each loan is for, and what the interest rate is on each.

3. Prioritize High-Interest Loans.

One common rule of thumb is to pay off any loans with an interest rate exceeding 5% before you start putting money towards retirement. Some federal loans, and the majority of private loans, will fall into this category. It’s a good idea to put extra cash in your budget towards paying these off faster, so you don’t accrue more interest than you need to.

4. See If It Makes Sense To Refinance Those High-Interest Loans.

If you do hold a high-interest loan, consider refinancing your loan. If you have a steady income and a history of on-time payments under your belt, many lenders will be able to offer you better rates — in lots of cases refinancing into a loan that could be under that 5% rule of thumb, freeing up more cash for retirement savings. Want a big picture view of how decisions like this are affecting your likelihood of reaching your retirement savings goals? Play around with Personal Capital’s Retirement Planner. It will give you a forecast of how your financial plans today affect your retirement in the future.

5. Know your employee benefits.

Some employers offer incentives such as 401(k) matching–if yours does, definitely try to contribute at least the amount that will be matched. If you don’t, you’re leaving money on the table!

6. What’s your mindset?

While it may be financially prudent to, for example, pay the minimum on your low-interest loan and contribute to a retirement account, there’s also something to be said about your attitude towards money. If it gives you peace of mind to know your loans are being paid off as quickly as possible, then by all means stick with that strategy as long as you’ve already saved up three to six months worth of expenses in an emergency fund.

Bottom line

Paying down student loans and saving for retirement are both very positive things, so you can’t really go wrong doing either. But you can optimize how you choose to divvy up your funds, and it’s worth doing the math now for larger returns down the road.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Catherine is a Senior Editor at Earnest. Earnest is a technology company using cutting-edge data science, smarter design, and software automation to rebuild financial services. Founded on the belief that financially responsible people deserve better options and access to credit, Earnest’s lending products are built for a new generation seeking to reach life’s milestones. Using a unique data-driven underwriting process, Earnest understands every applicant’s full financial story to offer the lowest possible rates and radically flexible loan options for living life.
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Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.