Pay Off Student Loans or Save for Retirement?

Why you should save for retirement even when you have student loans

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Student loan debt has a significant impact on both individuals and the overall economy. Around 62% of recent graduates from four-year colleges have student loans, and the average graduate in 2019 finished school with $28,950 in loan debt.

Paying off student loan debt payments can become a major challenge while trying to manage other competing financial priorities. Focusing on long-term goals such as retirement may seem like a distant priority.

However, it is extremely important that you save for retirement even when you are paying off student loans. You can—and should—do both.

Paying Off Loans vs. Saving for Retirement

Paying off student debt is an important part of achieving financial stability. But retirement can last 30 years or more, depending on when you stop working and how long you live.

To cover both living and medical expenses (which will increase as you age), you will need to replace at least 80% of your income during retirement. Social Security likely will not cover your full living expenses; in 2021, the average monthly Social Security payment is $1,555.

Starting to save for retirement early is as important as paying off student loans because of the impact of compound interest. For example, if you save $50 per month over 20 years, you will have to set aside a total of $600 per year, or $12,000 total. But with compound interest of 6%, that will be worth over $23,000—nearly double the amount that you contributed.

Before you begin making extra student loan payments, use a retirement calculator to see whether your savings are on track. Once you are regularly saving for retirement, you can look into making additional student loan payments.

Maximize Your 401(k) Match

One of the best ways to increase your retirement savings while continuing to pay down your student loan debt is to use any retirement benefits offered by your employer.

Many companies offer some type of matching contribution to 401(k) and 403(b) retirement plans. For example, if your company offers a 5% match, and you contribute 5% to your 401(k), your employer will add an additional 5% that doesn't come out of your salary.

Take advantage of these matching contributions by contributing up to the matching amount. Once you are vested in your retirement match, that money is yours to keep—even if you leave your job for another company.

Know Your Repayment Options

Prioritizing saving for retirement doesn't mean that you have no options for paying off your student debt. You can still choose a repayment plan that makes saving and paying down your debt easier. Your repayment options primarily depend on whether your loans are federal or private.


Private loans are made without federal funds and come with fewer repayment options. You will need to contact your lender, loan holder, or loan servicer to find out your repayment options. Many private loans can be refinanced to lower your interest rate.

If you have federal loans and don't choose a repayment plan, you will be placed on the standard plan, which will have your loans paid off in 10 years. However, you can switch to a different plan at any time to suit your needs and goals.

For many graduates, the best option is an income-based repayment plan, which calculates your monthly payment based on how much money you are earning. On these plans, any debt that remains after 20 or 25 years is forgiven.

There are many other types of repayment plans, which can be based on your income, discretionary income, or how quickly you want the loan paid off. If you have multiple federal loans, these can be consolidated so that you only have to make a single payment each month.


If you have a direct loan, you can sign up for automatic payments through your loan servicer. When you enroll in this program, you will receive a 0.25% interest rate deduction.

Choosing the repayment plan that best fits your financial situation will help you consistently pay down the balance of your debt while also saving for retirement. Remember to revisit your repayment plan options whenever your employment or income changes, to stay on track and make the best use of your money.

Other Financial Steps to Take While Paying Off Student Loans

As you save for retirement and pay off your student loans, you can begin to make progress on other important financial goals.

Pay Off High-Interest Debt

Some types of debt are more problematic than others. Low-interest student loans or mortgage debt eat up less of your income and are generally tax-deductible. Debt with interest rates higher than 6%, such as credit card payments, is a bigger drain on your resources and can quickly snowball into a significant financial burden.

If you have credit card debt, consider decreasing (but not stopping) your other savings and debt payments until it is paid off.

Create an Emergency Fund

An emergency fund will support you in case of a significant financial setback, such as losing your job or becoming temporarily unable to work due to illness or injury. Your emergency fund should cover three to six months of living expenses.

The best way to accomplish this goal is to automatically transfer money directly from your paycheck into a separate savings account until you’ve reached your savings goal. That money should be easily accessible in case of an emergency. Health Savings Account balances and Roth IRA assets may also be included as part of your emergency fund.

Save for Unexpected Expenses

This fund is necessary to avoid more costly credit card debt or personal loans if any unexpected medical, auto, or home expenses occur. Aim for $1,000 to $2,000 in an account that is separate from your regular checking.

Identify Financial Goals

Loan payments shouldn’t prevent you from pursuing important life goals. While your budget or personal spending plan may seem tight as you make these necessary payments, having a written plan can help to provide guidance when you are trying to prioritize how to spend your time and money.

Do you want to start a family? Buy a house? Move to a new city? Putting a short- and long-term financial plan in writing and identifying the steps needed to make these goals happen can increase the likelihood that you will eventually achieve them.

The Bottom Line

Creating a financial plan that is simple and flexible is the first step you can take to assume control over student loan debt. There are ways to fit your payments into your financial plan in a way that doesn’t neglect your need to save for retirement or pursue other important financial milestones.

Frequently Asked Questions (FAQs)

How do you consolidate student loans?

To consolidate student loans, you can combine several existing loans into one. This means you only have to make one monthly student loan payment instead of several. While there are certain requirements you must meet in order to be eligible, you can start the process by applying for a Direct Consolidation Loan.

What happens if you don’t pay student loans?

If you don't pay student loans, you will become delinquent, and interest will continue to accumulate. If you default on your student loans, you will face a variety of consequences. These could include collection fees, wage garnishment, federal payments being withheld, damage to your credit score, and more.

When might be the best time to start saving for retirement?

The best time to start saving for retirement is as soon as you can. The earlier you're able to start saving, the more time your money has to grow and accrue compounding returns.

How do you start saving for retirement at age 50?

If you're in your 50s and haven't yet started saving for retirement, you still have options. Contribute as much as you can to any retirement accounts you have. Those who are older than 50 are eligible to make "catch-up" contributions, meaning that the annual retirement savings contribution limits are higher.

Article Sources

  1. The Institute for College Access and Success. "Student Debt and the Class of 2019," Page 18. Accessed Dec. 13, 2021.

  2. Social Security Administration. "Social Security Basic Facts." Accessed Dec. 13, 2021.

  3. Internal Revenue Service. "Retirement Topics - Benefits of Saving Now." Accessed Dec. 13, 2021.

  4. Federal Student Aid. "Choose the Federal Student Loan Repayment Plan That’s Best for You." Accessed Dec. 13, 2021.

  5. Federal Student Aid. "Direct Loan Entrance Counseling Guide," Page 19. Accessed Dec. 13, 2021.

  6. Federal Student Aid. "Consolidating Your Federal Education Loans Can Simplify Your Payments, But It Also Can Result in the Loss of Some Benefits." Accessed Dec. 13, 2021.

  7. Federal Student Aid. "Student Loan Delinquency and Default." Accessed Dec. 12, 2021.

  8. Internal Revenue Service. "Retirement Topics - Catch-Up Contributions." Accessed Dec. 13, 2021.