Student Loans and Retirement: Weighing your Options

Student loans have recently become something of a hot topic. More households are taking out student loans to pay for college, and they’re borrowing increasingly large sums of money. Fully 60% of college graduates with a bachelor’s degree have student loans. Newly-minted college grads are finding themselves on the hook for an average of $27,300 in student loans, an amount nearly 300% higher than what new college grads just 20 years ago faced. Complicating matters, young workers are forced to juggle not one but two unfamiliar financial responsibilities – paying off student loans and saving for retirement.shutterstock_263664491

Recent grads face these competing priorities

Juggling these two responsibilities forces those with student loans to make a decision about what to do with the money they have left over after paying their bills. Should you pay off student loans as quickly as possible, or should you use that money to save for retirement? On one hand, paying off loans early and being debt-free is appealing for many people. But on the other, saving for retirement is important, even if it’s many years away. With two competing goals, what’s the best use of that extra money? And what is the tradeoff with prioritizing one over the other?

To help explore answers to these questions, we’ve released a new calculator. With it, you’ll be able to see how different student loan paydown strategies can affect your net wealth at retirement. We take into account income, age, loan amount and interest rate, employer match, and savings habits to determine the financial impact at age 65 of paying down student loans ahead of schedule.

Are student loans hindering your retirement savings?

Earlier this year, we released a paper examining the relationship between student loans and retirement savings. We found that, all else equal, higher amounts of student loans are typically associated with lower levels of retirement savings. Check out our other findings and read the rest the paper here.

In the paper, we analyze two scenarios, one in which extra discretionary money is saved for retirement, and one in which extra discretionary money is used to pay down student loans ahead of schedule. Then we look at what someone’s net wealth at age 65 would be under those two scenarios.

Most will find that they will be able to achieve a higher net wealth at age 65 if they prioritize saving for retirement, especially those who are younger. For those with an employer match on their retirement savings, this amount could be significant. But others – say, someone who is older and took out student loans to go back to school at age 55 – may be able to build a higher net wealth by age 65 by paying down student loans ahead of schedule. Find out for yourself!