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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.54% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of March 18, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 0318/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.5% effective February 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.54% – 7.12%3||Undergrad & Graduate|
|2.54% – 7.27%1||Undergrad & Graduate|
|2.67% – 8.96%4||Undergrad & Graduate|
|3.23% – 6.65%2||Undergrad & Graduate|
|2.54% – 7.43%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|