I started my get-out-of-debt journey five years ago with almost $50,000 in debt. At several points, I had to decide whether to prioritize paying off student loans or saving money.
My choice varied according to what was happening in my life at the time and the kind of student debt I faced. In fact, it’s a decision I’m still making. My husband and I have are still repaying $17,000 in student loans from his graduate degree.
Maybe you find yourself wondering if you should save money or pay off student loans. Yet both feel so important — how can you choose? Here are seven questions to help you decide.
Pay off student loans or save? 7 questions to ask
1. Do I need emergency savings?
The first thing to consider is whether you have a sufficient financial safety net — your emergency fund.
An emergency fund should be a buffer of cash that you keep on hand to weather any surprise expenses or emergency costs that life throws your way. This safety net is crucial for helping you avoid future debt and the worst consequences of financial setbacks.
Only you know how big your emergency fund should be to achieve the level of financial security comfortable to you. Some people might be okay with an emergency fund of just $1,000. For me, with a mortgage and two young children, a six-month emergency fund is a must.
You’ll also want to weigh emergency savings against student loans. Depending on the types of student loans you have and the interest you face, your student debt might feel like the emergency. If this is the case, you might choose a minimal emergency fund for now in favor of putting out the burning fire of your student debt.
2. Am I putting funds away for retirement?
Next up is another important financial goal: saving for retirement. When you’re facing student loan payments each month, retirement can feel far off.
However, when it comes to saving for retirement, there is no replacement for an early start. Even small contributions now can be worth thousands more in retirement, with decades in between to grow thanks to compounding interest.
Here are a few other ways saving for the future can be financially savvy:
- Your student loan interest is tax-deductible, which helps offset this cost
- Tax-advantaged retirement accounts let you lower your taxable income
- You get free money when an employer matches your retirement contributions
- You’ll see how investment rates of return often beat student loan interest rates
Student loan borrowers should think long and hard about whether it’s wiser to repay student debt or save for retirement.
3. Should I save for any major life events?
Consider important future life events for which you’ll need money. Unlike emergencies, these are anticipated and planned. These could include:
- Moving out on your own for the first time
- Moving to another city or state
- A wedding
- Starting a family
- Starting a business
- Going back to college or switching careers
- Getting a divorce
Just three months into my journey out of debt, for example, I found out I was pregnant with my first child. The timing was less than perfect, but at that point, it couldn’t be helped.
So my husband and I went to work on our budget. We calculated how much we’d need to save to buy baby gear, pay medical bills, and make up for my loss of income on maternity leave. And we scaled back some of our extra debt payments to build out our baby fund.
Spend some time thinking about your student debt and your significant life event. Five years from now, which would you regret more — delaying or not taking this life step, or still having your student debt?
At the same time, don’t lose sight of the financial side of the equation. Think carefully about how far a life event could set back your financial goals or student loan repayment.
4. Is there a major purchase I need to finance?
Along with major life events, you might also want to consider any upcoming major purchases — and how much these could cost you. Specifically, am I more likely to pay a higher interest rate on my future purchase than I’m currently paying on student loans?
For instance, I had undergraduate student debt with an interest rate higher than 6.00%. Because of the higher costs of this debt, paying it off took priority over other savings goals.
We eventually paid off those student loans and only had husband’s graduate student loans with an interest rate of just 3.00%. We discussed whether to use discretionary funds to pay off student loans or save for a home down payment.
After some research, we figured it was unlikely we would get a lower interest rate on our mortgage than what we were paying on these student loans. So we prioritized saving a down payment.
Sure enough, we ended up with a 4.125% rate on our mortgage. And every dollar we paid on our down payment helped limit our interest costs, lower our monthly payments, and even helped us avoid mortgage insurance costs.
5. What do I value most?
Of course, financial calculations and returns on investment are just one side of the equation. The other factor in any financial decision, including whether to save money or pay off student loans, is you. Specifically:
- What is most important to you?
- What are your goals and dreams?
- How comfortable are you with being in debt?
- What kind of lifestyle do you want?
- What are you willing to sacrifice to achieve this?
When you consider financial questions alongside your personal goals, you can have more clarity to decide what’s really important.
Our personal values were another big reason we decided to pay only the minimums on our student debt and prioritize saving for a home. I didn’t feel the homeownership itch, but my husband did. And he was willing to scale back other goals or expenses to do so.
You might have similar goals or achievements you value more than repaying student loans, too. Many people will live with student loan payments and interest if it means they can travel more while they are young, or work at a lower-paying job they’re passionate about, or build a robust investment portfolio.
Then again, that might not be you. You might be one of those people for whom debt is a significant source of stress, and you just hate the idea of having it. You place a high value on your financial freedom and the accomplishment of paying off your education. For you, paying extra on student loans would be a higher priority.
6. Can I work on savings and student loans at the same time?
Of course, your finances don’t have to be a zero-sum, all-or-nothing game. It can be possible, and even beneficial, to work toward the goals of repaying student loans and saving money at the same time.
Say you have $300 of discretionary income a month to put toward financial goals. You could put all of this toward either saving or repaying student loans. But you might also want to consider paying $150 to each goal, or $100 to one and $200 to the other.
Getting creative and being flexible in your planning can help you make progress toward more than one goal that’s important to you at once.
For instance, you could stay motivated with temptation bundling — tying your unsexy student debt repayment with a more exciting savings goals. Maybe you reward yourself for every extra $200 paid toward student debt by adding $50 to a vacation fund.
7. Could focusing on one goal help me achieve the other?
Finally, you might want to think through how your goals of saving and paying student loans can work together.
For instance, you might use money-saving strategies to find extra funds to put toward student loans. This can help you pay off student loans faster.
On the other hand, effectively managing your student loans can help you accelerate a savings goal. Refinancing student loans, for example, can cut interest costs or lower monthly payments. Switching federal student loans to an income-driven repayment plan could create enough room in your budget to start contributing to a retirement plan.
Or maybe after doing the math, you realize you could pay off one of your student loans in just six months. And at that point, you’d free up the money you’d been putting toward the monthly payment and could use it to save, instead.
So, you have some extra money left over each month that you can spend to improve your finances. On the one hand, you can see the light at the end of the student debt tunnel. You’ve focused on this debt for long enough that you’re ready for it to be over.
At the same time, you have other financial goals, life events, and big purchases to plan for. If you take some time to focus on what is most important to you not only with your money but in life, you can reach the decision that makes the most sense.
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