Why You Really Shouldn’t Save for Retirement If You Have Student Loans


So you’re done with school (hooray!), your six-month grace period is coming to an end (boo!), and you’ve landed a job (hooray!).

But during your new employee orientation, as the HR rep starts throwing around terms like “401(k) enrollment” and “company match,” you may find yourself wondering:

Should I pay off student loans or invest?

Or more accurately, since you have to make student loan payments no matter what, should you split your efforts between saving for retirement and paying off student loans, or should you focus exclusively on your debt until repayment is complete before opening that 401(k) or IRA?

The vast majority of personal finance advice would have you split your efforts. However, our advice is a bit different — and admittedly more controversial.

Simply put, you shouldn’t be saving for retirement if you have student loans.

But compound interest! You say.

But I invest with more valuable pre-tax dollars and pay off student loans with post-tax dollars! You say.

But the average stock market yield is greater than the interest rate on my student loans! You say.

Hear us out. There are two major reasons why you shouldn’t be saving for retirement if you have student loans.

1. You’ll be able to make bigger monthly payments

If you’re bringing home more money each month, that’s more money you have available to throw at your debt. This is especially crucial during the early years of repayment, when amortization is against you and little or none of your regular monthly payment is being allocated toward your principal.

Paying more than the minimum can help ensure you make real repayment progress.

Of course, it’s important you actually use the money you’d otherwise be investing to increase your monthly payments in order to put a substantial dent in your debt.

2. You’ll be extra motivated to pay off your student loan debt.

If the choice of whether to pay off student loans or save for retirement has been made, you’re able to focus on your chosen goal with all the zeal and intensity that you possess.

Especially if you believe that saving for retirement is important (and you should!), making the decision to delay pursuing that goal until after your student debt is paid off will serve as a tremendous motivator to knock those loans out as soon as possible.

Focusing exclusively on one goal helps keep you motivated by ensuring that you make significant, measurable progress each month. It may also encourage you to find creative ways to increase your monthly payment.

For example, even if you don’t want to give up cable permanently, could you do it for a year or two if it meant a debt-free existence at the end of that period?

If you’re not splitting your efforts between paying off student loans or investing, any action you take to increase your income or reduce your expenses will take half as long and have twice the impact. Knowing sacrifices are temporary can help make them more palatable.

Pay off student loans or invest: when you should do both

The majority of student loan debtors will make the fastest progress on their loan payoff by focusing exclusively on that goal. Even so, there are situations in which it makes sense to save for retirement while still in the student loan repayment phase.

Your employer requires participation in a retirement plan: Believe it or not, some employers require you to participate in their retirement plan — my first employer after I left school fell into this category.

For example, employers that enforce a mandatory retirement age and/or that offer defined benefit plans (i.e., traditional pensions) rather than defined contribution plans (i.e., 401(k) or 403(b) plans) may require their employees to make retirement contributions.

You’re holding out for student loan forgiveness: If you’re on an income-driven repayment plan because you’re pursuing Public Service Loan Forgiveness (PSLF), it may make sense to start retirement contributions right away.

For one thing, because your required monthly payment may be as low as $0 per month (depending on your salary and plan), you may not be splitting your efforts at all.

Additionally, many income-driven plans use your adjusted gross income (AGI) to determine your monthly payment. This means that participating in a retirement plan may actually lower your monthly payment and maximize the amount of your student loan debt that is forgiven.

Ultimately, of course, the decision whether to invest or pay off student loans is up to you. However, we at Student Loan Hero believe that by focusing your efforts solely on paying off your student loan debt, you can pay off your debt faster — probably significantly faster — and move onto the business of living with a clean slate.

Check out your student loan repayment calculator to see how you could accelerate your debt payoff.

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