Save for Retirement or Pay Down Student Loans: Where Should You Focus?

February 01, 2022 · 5 minute read

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Save for Retirement or Pay Down Student Loans: Where Should You Focus?

Money talks. And student debt proves you’ve made a massive investment in your career. While most people want to pay student loans off as quickly as possible, it can actually be smart to take a little longer to do so and start saving for retirement sooner.

Sure, retirement isn’t a trendy topic at happy hour. But concerns over investing in your future have a way of creeping up on you. In fact, respondents to a nationwide May 2019 survey , indicate that not saving enough for retirement is a major financial regret (27% of people).

The good news? Paying down your student loans while contributing towards your retirement (e.g. cruising the Mediterranean) is not only possible, but also very doable with the right strategy and just a little bit of patience.

Making At Least Minimum Student Loan Payments

When you have outstanding student loans, your first financial obligation is to make the minimum payments. If you don’t, you risk default, which could harm your credit score and, worse, lead to higher monthly payments and higher interest rates.

Automatic payments are a great way to help ensure you never miss a due date. Autopay can also potentially save you money too, as many private and government loan servicers offer an autopay discount.

Taking Advantage of Employer Matching Benefits

When you start a new job, you’re pummeled with decisions regarding insurance, 401(k) plans, and other benefits. Sure you get a big 401(k) information packet, but many people just scan that material or skip it altogether. A tip: don’t do that. You could miss out on a big opportunity—namely employer-matching benefits.

Many 401(k) plans include a match on employee contributions as a percentage of your annual salary. That is free money each year contributed to your retirement account. To get the match, you usually do have to contribute to the plan yourself. Make sure you don’t leave that money on the table.

Making Extra Loan Payments When Possible

If you have leftover income each month that’s not used for living expenses, loan payment minimums, or to supplement your emergency fund, you could pay more toward your student loans to lower the balance.

For example, if you get a tax refund or a bonus at work, you could put it toward an extra student loan payment. It’s money you don’t rely on for your monthly budget, so use it as a tool to get out of debt as fast as possible.

Making extra payments can save you a little bit in interest every month for the entire life of the loan. To get an idea of how much you would save by paying your loans off early, you can use this student loan calculator.

If you focus on paying off your student loans early, you could save money on interest over the life of the loan and then take those savings and put them towards retirement.

Refinancing Your Student Loans

Another option to help speed up your student loan payoff date and put saved money towards retirement is to refinance your student loans. When you refinance, you take out a brand new loan with a private lender at a new rate and new terms. You can usually refinance both private and federal student loans, but keep in mind you’ll lose access to federal benefits (such as deferment, forbearance, and forgiveness) if you refinance federal student loans with a private lender.

Refinancing can be a great idea if you have a stronger financial profile currently than when you took out your original student loans. If you qualify for a lower interest rate on your new refinanced loan, that could help save money over the life of the loan. Those extra savings could then go towards your retirement savings. You can check out this student loan refinancing calculator to see how much you could save by refinancing.

Stepping Up Retirement Savings

If you keep true to your budget, make student loan payments responsibly, and still have income to set aside at the end of each month—then you could funnel those extra dollars into retirement savings.

For most young professionals, a Roth IRA—a retirement account that allows you to set aside after-tax income for tax-free withdrawal in retirement—can be a solid investment option once you are taking advantage of the full 401(k) employer match. Prepare for retirement with a online ira from SoFi Invest.

While the name is stodgy, the impact on your bank account is anything but. Roth IRA investments are typically preferred for professionals in their 20s, 30s, and 40s due to how they are taxed. All of the money going into your Roth IRA is taxed, so that when you take out your money in the future it will be tax-free. Younger people are generally in a lower tax bracket, so choosing a Roth IRA could make sense compared to a Traditional IRA where you would be taxed for taking your money out later (when you may be at a higher tax bracket). For more information on which IRA account could be right for you, you can check out our IRA calculator.

For a more complex retirement savings system aimed at investors with retirement dates farther into the horizon, consider the following in terms of priority:

– Investing in your employer 401(k) until reaching a full employer match.

– Putting money in a Roth IRA until reaching the annual maximum or income limit. The 2022 limit is $6,000 for individuals under age 50.

– Dropping more into an employer 401(k) up to the annual maximum, which is $20,500 for 2022.

– Depositing additional dollars into a regular investment account through your favorite brokerage or through SoFi Invest®, which also offers IRAs.

Getting on Track Today

Retirement might seem a long way off, but every year counts when your goal is financial comfort. It’s okay to start small, especially while keeping your loan debt in check.

By taking practical and responsible steps today to put your student loans behind you, you could be debt-free in no time, and on track for that dream retirement.

Consider refinancing your student loans with SoFi. You could qualify for a new interest rate and loan terms to potentially free up some money for your retirement savings. Check your rate in 1 minute!

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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