How to Successfully Balance Saving For Retirement and Paying Off Student Loans

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Every financial decision you make is a trade-off. When you set money aside for retirement, you have less for paying your student loans — and vice versa. So should you pay off student loans or save for retirement first?

While there’s no hard-and-fast formula that fits every person, you don’t have to choose between paying off student loans or saving for retirement. Here are steps to take to balance both.

Should you pay off student loans or save for retirement?

If you’re wondering whether you should pay off student loans or save for retirement, first know that it isn’t a black or white choice. You can accomplish both at the same time, while also prioritizing one over the other depending on your situation and goals.

Before choosing your top priorities, though, we recommend building your emergency fund.

1. First, start a rainy day fund

Before we take a deep dive into the 401(k) vs. loans conversation, let’s highlight an important point: You need to have a “rainy day fund,” also known as an emergency fund, before you make any other financial moves.
This is the cash cushion that will save your butt when life takes an unexpected turn. If you lose your job in the same week that your car breaks down, you’ll be glad to this fund.

Aim to build a rainy day fund that would cover at least three to six months’ worth of your expenses. Consider opening a high-yield savings account to maximize your savings.

2. Maximize your employer match

If your employer matches any portion of your 401(k) contributions, start by contributing enough money to your 401(k) to collect your full employer match.

Let’s say your boss will match your contributions, dollar-for-dollar, up to 5% of your salary. Assuming you earn $40,000 annually, 5% would be $2,000. So if you manage to contribute this amount to your 401(k), your employer will put in another $2,000.

Grabbing your full employer match is the only guaranteed, risk-free investment you’ll ever make. If you have the opportunity to capitalize on an employer match, make this your top priority.

3. Learn the difference between high-interest and low-interest debt

Not all debt is created equal. Credit card debt often carries an extremely high interest rate — sometimes as much as 14% to 22%. Student loans, on the other hand, typically carry single-digit, fixed interest rates. This interest usually is also tax-deductible.

While all debt is a drain on your finances, student loans typically are the lesser of debt evils. The interest rates are comparatively low, they offer a repayment period that varies from 10 to 25 years, and you may have the opportunity to further reduce your monthly payments by refinancing your student loans.

While you don’t want to fall behind on your payments, you don’t have to be as aggressive about paying off your student loans as you should be with a high-interest loan such as a credit card. Prioritize paying off high-interest debt (anything with double-digit interest rates) before you start aggressively tackling your student loans.

4. Set a retirement savings goal

Once you’ve prioritized your debt repayment, it’s time to think about your retirement savings goal. When saving for retirement, aim to replace 70% to 85% of your pre-retirement expenses.

Let’s say that you and your spouse currently have a lifestyle in which you spend $80,000 a year. You’ll want to have 70% to 85% of that amount, or $56,000 to $68,000, for each year in retirement.

Let’s grab the number in the middle: $62,000. Multiply this by 25 years, and you arrive at a value of $1,550,000. This is the estimated amount you’ll need in your retirement portfolio (excluding any other sources of income) in order to achieve an income of $62,000 per year.

Multiplying by 25 allows you to withdraw 4% of your retirement income annually, a rate that financial experts generally consider to be the “safe withdrawal rate.”

Once you have your retirement number, use one of the many free online retirement calculators to determine how much you’ll need to put aside each year in order to reach that goal by your planned retirement age.

Can you contribute this amount while still making the minimum payment on your student loans? If so, you’re in good shape. If not, you may need to reduce your monthly expenses or take on a side hustle.

5. Know your limits

At this point, we’ve established a few things about your financial situation:

  • You’re collecting your full employer 401(k) match.
  • You’re first paying off credit card debt or other high-interest (double-digit) debt (or don’t have any).
  • You have savings for a rainy day.
  • You’ve calculated how much you need to save for retirement, and you’re meeting your retirement savings goals.
  • You’re making your minimum student loan payments.

At this point, let’s assume that you still have money remaining each month. You’re trying to decide whether to use this money to make extra payments on your student loans or make bigger strides towards your retirement savings. Where do you go from here?

Figuring out the answer starts with knowing your limits.

Limit #1: Your retirement savings maximum

Take note of how far away you are from reaching the IRS maximum on annual contributions. There’s a cap on how much you’re allowed to contribute to your 401(k) each year. In 2020, that limit is $19,500, with an additional $6,500 catch-up limit for those over the age of 50.

If you’re close to maxing out your retirement account, you might decide to reach that maximum threshold. Cross it off your list. At that point, you can turn your full energy towards aggressively repaying your student loans.

Limit #2: The remaining term on your student loans

Take note of how close you are to obliterating your entire student loan balance. How soon would you be able to erase all of your debts?

If you’re close to repaying all of your student loans in full, you might choose to wipe out the remainder of your debt balance. Once you do, you can devote your energy toward building your 401(k).

Not close to either limit? Make a judgment call

Do you want to split your extra money 50/50 between saving more aggressively in your 401(k) and repaying your student loans? Or do you want to emphasize one goal over the other?

At this point, your decision becomes personal. Which of these two issues keeps you awake at night? Which result would give you more satisfaction?

Also, can you expect the long-term returns on your retirement account to be greater than the total amount you’ll spend on student loan interest?

Weigh out the pros and cons of each to decide which approach makes more sense for your finances as well as your personal goals.

Strike the right balance between paying off student loans and retirement savings

How you handle your money is based on a number of personal factors, from your current debt load to how much you’ve already put aside for retirement.

The best strategy is to balance both short- and long-term goals. Choose a goal that gets you excited, and you’ll set yourself up for a happy and secure future.

Paula Pant contributed to this article.

Interested in refinancing student loans?

Here are the top 6 lenders of 2021!
LenderVariable APREligible Degrees 
1.89% – 5.99%1Undergrad
& Graduate

Visit Splash

1.99% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.99% – 6.84%3Undergrad
& Graduate

Visit CommonBond

1.91% – 5.25%4Undergrad
& Graduate

Visit Lendkey

2.25% – 6.53%5Undergrad
& Graduate

Visit SoFi

2.17% – 4.47%6Undergrad
& Graduate

Visit PenFed

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.


2 Important Disclosures for Earnest.

Earnest Disclosures

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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 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 CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for LendKey.

LendKey Disclosures

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.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.


5 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: 1. Fixed rates from 2.99% APR to 6.99% APR (with AutoPay). Variable rates from 2.25% APR to 6.53% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.12% plus 2.38% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score.Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

6 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.99%-5.15% APR and Variable Rates range from 2.17%-4.47% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.