Should you start saving for retirement before your student loans are paid off?

Should you start saving for retirement before your student loans are paid off?


Listen up, Millennials. If you have student loan debt, this one’s for you.

We know you have a lot on your plate, and your generation seems to take a lot of flak on just about everything you do. Maybe you’re trying to set up your first household, get married, buy a house, or have kids. Being a grownup is expensive! But instead of blaming avocado toast for the lack of Millennial-aged house-hunters, perhaps we should instead look at the effects of rising higher education costs.

According to Forbes, the average American household with student debt owes about $49,000 [1]. Yikes. With all of that college debt looming large, it’s no wonder Millennials have delayed traditional timeframes for buying houses and starting families. But it may also affect how—and when—Millennials begin saving for retirement. Should Millennials focus on paying back student loans as fast as possible, or should they allocate more dollars per paycheck to begin funding retirement? What makes the most sense?

Is it more important to pay back student loans or save for retirement first?

It can be tempting to double down on student loan debt with the goal of putting it behind you. “Once my student loans are paid off, then I’ll start saving for retirement!” you think. While that may feel like the right choice emotionally, logically the numbers tell a different story.

Let’s break it down and look at two hypothetical recent graduates. One makes retirement a priority and only pays the minimum on her student loans, while the other decides to completely pay off her student loans before contributing any funds to a retirement savings account. 

Let’s say both graduates have $30,000 of debt at a 3.7 percent interest rate. Under a standard monthly payment plan, our graduates can expect to pay $217 a month for 15 years or $2,604 annually, which equates to a total repayment amount of about $39,100. Now let’s assume each graduate can afford to contribute $5,000 a year to some combination of loan repayment and retirement.

The first graduate (Grad 1) invests $2,500 per year into a retirement plan and puts the other $2,500 toward her student loans. She does this for 15 years, from ages 25 to 40. Then once her loans are paid off, she begins putting $5,000 into retirement annually until age 65.

The second graduate (Grad 2) puts the entire $5,000 a year into her student loans and pays the loan off completely within seven years. Then she begins saving for retirement at age 32, still contributing $5,000 annually.

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Both graduates allocated the same monthly payment to student debt and retirement, but Grad 1 is more than $60,000 ahead of Grad 2 at age 65. Really, the only difference between the two is time. Grad 1 took advantage of compound interest in her retirement account and gave her money more time to grow, while Grad 2 started contributing to her retirement account seven years later.

Now let’s make it more interesting. Many employers across the United States offer matching contributions to employee retirement funds up to a certain amount, so we’ll factor in the benefit of an employer match. Let’s assume our graduates’ employers offer a 100 percent match on all contributions, up to a maximum of 3 percent of their annual income. If our young professionals earn $50,000, which is just above the average starting salary for 2017 graduates [2], they can gain another $1,500 per year in retirement contributions from the employer match. 

Under this scenario, assuming both of our graduates get the full employer match as soon as they start saving, our early saver Grad 1 comes out a sizable $183,956 ahead at retirement time. 

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Should you prioritize student loan repayment over saving for retirement?

The key takeaway here is that you need to be on a path to repay your student loans while still making your retirement fund a priority. If you have income left over after paying your minimum debt obligations, the extra money should go towards funding retirement.

The only caveat is that you want to make sure you’re always covering the interest on your student loans, reducing the principal of the loan, and ensuring that your student loan interest is less than the long-term rate of market returns (estimated here at 7 percent). 

Getting rid of college debt has a feel-good factor that many Millennials are waiting to experience, but as our example shows, preparing for retirement is a smarter use of the same money. And thanks to compounding, you may end up hundreds of thousands of dollars ahead if you choose to prioritize saving for retirement as a young professional.


Kent Wright – Due Diligence and De-accumulation Analyst – jkwright@pai.com – 800.236.7400 Ext. 3252

Kent is a subject matter expert on 401(k), retirement accounts, investments, and financial services. Kent is also a published author.