By now, you’ve probably already heard that the student debt crisis in America is off the charts.
In 2019, the total student loan debt balance topped $1.5 trillion, almost 50 percent higher than the national credit card debt. Of that amount, millennials ages 25 to 34 account for over $497 billion, and 15 million borrowers, with an average student debt of $33,000.
If you have a graduate degree, it’s not uncommon for that figure to be in the six digits – and not the kind you’d like to see on your paycheck.
In other words, the student debt struggle is real.
Combine increasing tuition rates with stagnating wages, and it’s no surprise that many millennials are choosing to prioritize their debt over their retirement.
Paying off your loans can be stressful – I know first hand – and sometimes knowing you’re decreasing the balance feels better than saving for a date 30 years in the future
The problem is, many graduates don’t realize that it can be much more expensive — and in some cases, impossible — to catch up on your retirement the longer you wait.
A recent study found that 73 percent of borrowers are either not maximizing their accounts, or not saving for retirement at all until their student debt is paid off.
For many, it can be hard enough to meet their minimum payments, let alone finding extra cash to invest. Others, affected by lifestyle inflation, rather live it up now than invest for later.
So the question is, how can you balance both? It'll take making some smart money moves.
Below are five things to consider when deciding to double down on your debt, invest for retirement, or both.
1. Remember that investing is key
If you’re able to make extra payments on your student debt, it’s easy to think that’s the number one priority. What you may not realize, however, is how much more expensive it is to save for retirement, the longer you wait.
For example, someone that invests roughly $250 per month, starting at age 25, would have $656,203 by the time they were 65 years old, assuming a 7 percent rate of return. The same person beginning at 35, would only have $450,263. Even if they increased their contributions to $350 per month, they would still only have $630,369, about $26,000 less than if they started earlier, with less money.
The reason for this is because of how compound interest works.
Compound interest means that your investments grow based on the amount you contribute and the amount earned.
So when you’re starting to invest, you may not see your investments take off right away. But as they grow and compound, the value will increase much more quickly over time.
This is why it’s so important to start saving for your retirement as soon as you can. Waiting even just a few years can cost you tens to hundreds of thousands of dollars in the long run. This means you want to get started immediately, if possible.
Want to know how much of an impact investing early for retirement can make for you? Check out this retirement calculator to help determine whether it’s worth paying down your debt more quickly, or investing for the long haul. Keep in mind the earlier you start investing, the less money it’s going to cost you over time.
2. Don’t let free money sit on the table
If your employer offers a retirement account, like a 401k, they may also provide what’s called an “employer match”.
An employer match is a certain amount of money, usually a percentage of your income, that your employer agrees to contribute up to a certain amount, as long as you also contribute each month.
Think of it as free money so long as you do your part. The exact amount of your match will vary from employer to employer. In some cases, it represents a guaranteed, 100 percent return on your investment – an opportunity you will not find anywhere else.
This makes meeting your employer match a no brainer. If you’re already making the minimum payments on your student debt, I recommend you do this too.
If you’re struggling to meet your minimum payments, consider revising your repayment plan to enable you to meet your employer match.
You may also want to revisit your budget. Are there any expenses you can cut to take advantage of your match, or split the extra cash between your loans and retirement?
The bottom line is, do everything you can to take advantage of the free money coming your way!
3. Consider your interest rates
When deciding whether to make an extra payment on your student loans or save for retirement, you’ll want to take a look at your loan interest rates.
For federal loans, they are likely in the 3-5 percent range, which is less than the historical U.S. stock market return of around 6 percent over any 30 years.
This means you may want to start investing for retirement first, as you have a longer time horizon for that money to compound or grow later. This is especially true if you have an employer match.
If your loans include private loans, the interest rates on these are likely higher – around 8 or 9 percent. While the difference of a few percentage points may not seem like much in the short term, depending on the size of your loan, this can cost you a lot of money over time, making even half a percentage point relevant.
In this case, after meeting all of your minimum payments, you may want to hold off on investing for retirement until you’ve paid down your higher-interest loans. Or maybe you decide to split the amount, putting the majority towards your debt and the rest towards your retirement. Once you’re left with only the lower interest debts, you can play catch up on your retirement contributions.
4. Take advantage of all your options
If you don’t have an employer match or you’re self-employed, you still have options to save for retirement. One is called an individual retirement account (IRA), and there are many different kinds depending on your preference and lifestyle.
An IRA is a tax-advantaged retirement account you can set up through a financial provider that is entirely separate from your employer. Some questions you’ll want to consider in deciding between a traditional, Roth, or other IRA include whether you prefer to make pre or post-tax contributions, and might you want access to those funds before you retire?
Other factors that will help you decide include whether you are self-employed, married, or run your own business.
Once you have an IRA, an employer match won’t come into play, but at least you can still contribute every month to take advantage of that growth over time.
Contributing 10 percent of your income towards your retirement is a great goal to get you started.
Regardless of your starting point, you’ll want to increase your contributions over time, and as you pay off your debt until you eventually reach the max contribution limit ($19,000 for a traditional IRA, and $6,000 for a Roth IRA for the 2019 and 2020 tax years).
5. Don’t forget about your taxes
One benefit of contributing to your retirement through a traditional 401k or IRA (but not a Roth IRA) is that they lower your tax bill at the end of the year. Your taxes are reduced because you can deduct your contributions from your reported income (and thereby reducing the amount of taxes you owe).
This would be in addition to any tax deduction you might receive for paying down interest on your student loans. If you’re starting to pay down your debt, you’ll likely owe more interest on your loan than principle, making you more likely to qualify for that deduction.
So while contributing to your retirement while paying down student debt may not be a walk in the park, at least the IRS might give you some money back at the end of the day.
Kimberly Hamilton is the Founder of Beworth Finance where she teaches millennials to make smart money moves. Student debt saga turned financial educator, she has been seen in Forbes, Business Insider and Newsday, among others. After paying off $45k worth of student debt in three years, Kimberly started Beworth to provide more approachable advice to the average money maker. When not running her company, she can be found planning her next vacation – she’s been to over 30 countries! To learn more, visit www.beworthfinance.com.