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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Published in Investing for Retirement, Pay Off Student Loans, Retirement

  • Corey Berman

    It really depends on what interest rate your loans have, and the return you expect from investing. Paying student loans is equivalent to earning a guaranteed rate of return equal to the interest rate. Say you have 3% loans and expect 6% from investing, it is a better long term strategy to favor the investments, although there is more risk as the return is not guaranteed. And of course, if you have loans with around 8% or higher interest, that would almost always be better to pay down before investing.
    The point from #1 that amortization is against you, is not a strong argument because if you were to invest the money instead, compounding would be working for you in the same way.

  • Zach

    I wanted to follow up on a related note: I have ~$110k in debt, but ~$30k invested in stocks. I’ve held on to the latter assuming it wiser to have some investment money around in case something really bad happens. Also I’ve worried that if I were to just sell it all off in order to pay down the student debt, the tax penalty would be so great that I’d be effectively throwing away tons of money I could otherwise spend meaningfully. Is there any sage advice for someone in my situation?

    • KachitaB

      Federal loans? Income Based Repayment. Debt is forgiven after 20 or 25 years of on time payments!

  • Jay B

    This is completely incorrect advise if your company matches any investment. In all other situations this is just bad advise.

  • Joe Koss

    Great tips on paying down debt as being the goal. Saving for retirement is important and taking full advantage of the time value of money concept is what we all want to do to build more wealth. However, we need to afford the saving we are making toward retirement. When I was paying off my student loans, I was investing toward retirement. I was getting a match that I could not turn down. For every dollar I was contributing up to 4.5%, I would get a 2-for-1 match. I had to take the 9% match my employer was offering since I was paying much lower of a percentage on my student loan and getting that type of return in the stock market is not guaranteed.

  • Hi Zach,

    It’s a pretty tough call. Like other have pointed out, one way to look at it is what can you expect to gain on returns from investing versus the interest charges on keep student loans?

    Other financial experts, like Dave Ramsey, will tell you to cash out all investments and put it towards paying down your debt.

    The truth is there’s no one solution for everyone. If you’re looking for personalized help, it’s likely best to meet with a financial planner to evaluate your situation.


    Student Loan Hero

  • Hey Joe,

    Great point. It’s hard to pass up an employer match like that.



  • KachitaB

    WORST ADVICE EVERRRRRRRR. Most people with large debt qualify for Income Based Repayment which is forgiven after 20 or 25 years! So absolutely save for retirement, while making the minimum payments on federal loans.

  • Thanks for your comment. You’re certainly right that forgiveness can definitely factor into some borrowers’ decisions to invest now. However, this strategy unfortunately won’t work for everyone.

    Many borrowers with average income and average debt won’t be eligible for forgiveness as all their debt will be paid off before they hit the 20-year mark. In this case, reducing payments on IBR would mean borrowers would pay more interest over the life of their loans than if they used Standard Repayment or made extra payments to pay off their student loans early.

    We recommend checking out the Repayment Estimator tool from the Dept. of Ed. when comparing student loan forgiveness options: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action


    Student Loan Hero

  • Caty Schmitter

    I was going to forward this article to a few friends in school but noticed that you don’t mention employer matches anywhere – if an employer offers a significant match on retirement savings, that should come before paying down student loans. This should really be noted somewhere, as many employers offer a match.

  • John Ryan

    I have to agree that this article is half baked and probably not a winning strategy for most individuals. It completely ignores the federal income tax saving of lowering your tax bracket from 25% to 15% through additional contributions to a 401K or a 403B plan on top of employee match plans. Applying the author’s proposed strategy would require a very complex calculus that takes into consideration the time value of money as well.

    Of course, if one invests their retirement savings poorly and loses it all in the stock market it certainly makes more sense to pay off your student loan. However, that is unlikely when long term analysis of the equities market is applied. The article should really be re-written and focus on 3 or 4 real scenarios that could elucidate the proposed strategy hypothetically with various levels of student loan debt and current salary of the individual employing the strategy. In general, it is best to absolutely minimize current student loan payments through a combination of reducing post-tax income and lengthening the student loan pay back period to take advantage of loan forgiveness plans.