22 Sep

Student Loans vs. Retirement Savings: Deciding Which to Tackle First

Is there anything more exciting right now than graduating and landing that first post-college job?

Of course, mixed in with that euphoria is the knowledge that pretty soon, you’re going to have to start repaying those student loans. And you’ll need to start thinking about the future — aka, retirement.

The average student loan debt is more than $25,000 for 20-somethings — not exactly small change when you’re just starting out. But, as some experts point out, it’s a debt that can be paid off within 10 years if the first job you land has an annual salary more than your debt load. Of course, $25,000 is just an average, and new graduates may leave the academic world $50,000 or more in the hole. So this begs the question: What should I do first, start chipping away at my loan debt or saving for retirement?

Find what’s best for you

There’s really no one right answer, although experts do give saving for retirement the edge in most cases. To come up with the plan best suited to you, consider your unique circumstances:

Do you have low-interest-rate loans? Consider making the minimum payments on your student loans and put your excess cash into retirement. Money you put away in your 20s is usually worth more than what you invest in your 30s, simply because it has more time to grow. If your student loan interest rate is less than the return rate you can expect to earn on your retirement investments, this choice can make sense. The earnings on retirement savings may be more valuable than the interest you save by paying off your student loans faster. Other benefits of putting more into retirement savings include potential employer-matching contributions and tax breaks. For most people, saving for retirement will only get harder as you assume additional financial obligations, such as a home mortgage or child-rearing expenses, as you get older.

Do you have high-interest-rate loans? Think about saving for retirement later and aggressively tackle those student loans now. This may be the option for you if you have private or older federal loans with higher interest rates. That’s because your student loan interest could outpace your retirement investment earnings.

Do you have interest rates that aren’t too high, but aren’t too low either? Consider tackling both student loans and retirement. Divide up funds equally and apply to both.

Still on the fence? The best choice for your situation may not be clear to you. If that’s the case, consider sitting down with an investment professional with NCU wealth Management to help sort out your options.