Fast Track To Student Loan Repayment May Have Adverse Impact On Retirement


I have a secret – out of all the financial worries on my mind, student loan debt is the least of them. Before you banish me from the ReadyForZero Blog for saying my focus isn’t on my debt, allow me to explain.

I’m 31 years old and don’t have retirement savings. Now, honestly, I don’t really ever plan to retire. I love to work – especially when that work is writing. But that doesn’t mean I don’t think I need to have a retirement fund. At one point or another it may become impossible for me to continue workingand at this point I don’t feel at prepared for that possibility.

So how did it get to this point? It was a combination of only earning enough to make ends meet during my first five years out of college, then moving for my career (twice), then paying off credit card debt, and now supporting myself and my husband as he pursues his dream of starting a startup. Oh yeah, and we have to pay for another wedding.

As much as I hate the fact that I’m losing thousands of dollars to interest every year I’m still paying on student loans, I’m equally as concerned about the fact that I have a savings account but no retirement fund. The clock is ticking for me with compound interest and I’m struggling to find room in my budget to both make my student loan payments (and other bills) and put money away for retirement.

As it turns out, this is not an uncommon dilemma. Young professionals and new graduates alike are trying to find the balance between paying off college debt and saving for their future. And, as highlighted in a recent article in The New York Times, getting on the fast track to paying off student loan debt could mean compromising your retirement.

The Cost of Not Going to College

The topic of student loan debt has hit anger-inducing levels in the US population. I’ve heard Baby Boomers and Gen X’ers say that Millennials foolishly take out more debt than they can handle. And I’ve heard Millennials say that they felt they had no choice – especially considering the parental and societal pressure to go to college:

“It’s hard for new college graduates — let alone teenagers making the initial borrowing decisions — to wrap their heads around this possibility when the shortfall is 40 or 50 years away. The whole world is telling them that they should go to college, and they should. But taking on debt to do so leads hundreds of thousands of new graduates each year to forgo saving money for years afterward. The long-term cost ought to be part of the bigger conversation.”

Now that the debate has hit such emotional levels, some are starting to question the validity of going to college at all. As logical as it is to say, “if something’s too expensive, don’t buy it”, that ideology could be throwing the baby out with the bathwater – at least when it comes to college.

It’s an undeniable fact that college is quickly becoming an unreachable expense for many. But it’s also an undeniable fact that college leads to higher earnings for an entire lifetime.

Prove it! You might say. The New York Times offers some compelling statistics:

“David Leonhardt reported on The Upshot last month, the earnings gap between American college graduates and everyone else has never been higher. People with a diploma now earn 98 percent more per hour on average than those without a degree.”

These reports of higher earnings are exactly why so many claim college to be an investment. Yes, it costs (a lot) of money upfront. But it also sets the average college graduate on a trajectory of higher earnings straight out of the gate; even if the earnings don’t seem high enough in comparison to student loan payments.

The Case for Building a Retirement Savings

Debt brings with it a sense of urgency. Every time we make a payment on debt, we feel that money exiting our bank account and we hate how much of it goes to interest instead of principal. Retirement on the other hand, tends to feel unimportant until the day it all of a sudden feels important.

I spent my early 20s focusing on one thing: becoming debt-free. Nothing else seemed as important as removing that black cloud of debt from over my head. Then all of a sudden, one random day in my late 20s, the importance of saving for retirement hit  me over the head. I’m still not sure what sparked the lightbulb, but once it was lit it was all I could think about. What was I thinking? I wondered. How could I have wasted so many years not trying harder to save and invest?

Unfortunately, debt just has a way of inciting a visceral reaction (must.get.out.of.debt.NOW!) while retirement brings on a more lackadaisical feeling (yeah, yeah….I’ll get to that soon…). But this is a costly mistake, as highlighted in the following graph:

Graph from The New York Times

Graph from The New York Times

As you can see, the person who started saving $3,780 per year at 22 ended up with almost $400,000 more than the person who started saving $10,368 per year at 32. In other words, don’t believe that you can make up for lost time by saving more later. Compound interest will still always favor the early saver.

Striking a Balance Between College Costs and Retirement Savings

We’ve talked about the expenses of going to college as well as the case for investing in those expenses. And we’ve talked about the cost of waiting to save for retirement. So how can we strike a balance between the two?

If You’re A Student Now, Keep Your Costs Low
It almost goes without saying – almost. The most important thing future and current college students can do is keep their costs as low as possible. The New York Times highlights a few well-known strategies, including: attend a community college first to save on the first two years of school, live at home with your parents instead of dorming, work while you’re in school, and avoid costly private loans.

There’s also a case to be made for balancing your decision when choosing a college or university. Time recently talked about a boy who has two schools to choose from. One is “better” for his program, but could cost him double the amount. His parents prefer him to go to the “better” school and will offer him more help (still resulting in more debt for him). This isn’t an easy decision to make – especially if you believe your career is on the line.

But we no longer live in a society in which a student should go to the best school they can and worry about the rest later. Strike a balance in your decision by weighing the school’s academic programs, how happy and productive you’ll be in the environment (thus increasing your chance of graduating), and the school’s reputations for job placement after graduation. It’s not black and white – weigh all these factors equally before making a decision. Then use this calculator to understand how much you’ll have to repay later.

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If You’re in Student Loan Repayment, Leave Some Room for Retirement Savings
If you’re now in student loan repayment, you may have a desire to dump any and all of your funds into getting rid of that debt fast. Fight this urge and allocate at least some percentage of your monthly income to a Roth IRA (assuming your company doesn’t provide a 401k). Remember, you don’t have to save a lot to make a big difference as long as you start early.

If your monthly payments don’t currently leave room for retirement contributions, consider IBR to lower your payments so you can allocate the difference to your retirement savings. And finally, if you are able to make your payments but need to see more of a dent in your progress, then pay your loans biweekly. By splitting your monthly payments in half and paying them every other week, you could save thousands of dollars in interest and take years off the life of your loans, without drastically increasing your monthly payment amount.

Final Word

Young professionals certainly don’t have it easy these days, a fact perfectly stated in The New York Times:

“It is hardly fair that millions of young adults should be saddled with debt at the same historical moment when they’re increasingly responsible for paying for retirement and health care.

But this is the world we live in, where college is necessary but a mild five-figure student loan debt can lead the unaware into a six-figure shortfall later on.”

Every generation is dealt its own unique challenges. The silent generation had The Depression and World Wars I and II. The Baby Boomers reached great success only to lose much of their retirement during the Great Recession. And now Millennials are facing rising costs of student loan debt in a tough job market. But like all generations, we can rise above the challenges and work for a better future. All it takes is some hard work and creativity with a focus on balance!

Image Credit: Nathan O’Nions

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  • pat

    Do you need to set up an IRA?

    • Shannon_ReadyForZero

      I definitely should do that asap – though I would lean towards a Roth IRA. On my financial to-do list!

      • pat

        Good idea, take advantage of your current tax bracket!

  • Lil25

    So the question then becomes: Is grad school worth it?

    • Shannon_ReadyForZero

      It could be! The answer depends on what you want to do, if grad school is the only way into your desired career (ie med school or law school) and if the cost of the program can be justified by future pay. However, going to grad school to escape a tough job market (something I’ve been tempted to do in the past) could be a dangerous financial decision.

    • Holly

      Unless it is for a professional degree (medical, etc.) or specific profession (library science)… then no, it’s not work it. Take it from someone who went.

      • Holly

        worth it… not work it. But feel free to work it as well. 😉

  • Kathy from CT

    When my oldest (now 25) was in high school and we were attending all those financial seminars for college planning, etc., I never understood the push for (1) parents to refinance their home and/or take out loans and (2) student take out loans & be in massive debt when they get out of school. I thought it was because I wasn’t financially savvy and was missing something everyone else figured out. I would ask all the instructors, who would get annoyed with my questions, give non-answers, and make me feel like I was an idiot for even asking. Nevertheless, I was adamant that we would NOT (1) refinance our home or take out loans and (2) none of my sons would take out loans either. Which limited their choice of colleges to state universities and/or scholarships. A roof over their head, food on the table, gas in their car, and small college accounts — those were our contributions. And they knew that from a very early age.

    Yes, they were not happy – all 3 of them, so at least it was across the board – especially when others were going to Ivy League schools that were out of their reach financially. Also, I was viewed by other parents as stingy. One parent even went so far as to say I was being selfish by not giving my children “every opportunity”. (yeah, she ain’t my friend anymore!). Fast forward 9 years, and my now-adult sons are all now thanking me.

    That is the 2nd time my gut was better than the so-called experts. The 1st time was when we met with a financial adviser when my 3rd son was born & we had 3 under the age of 4. He advised us (1) to find another day care because we were spending too much on day care and (2) fund college then retirement. Got rid of him fast & went with what I understood & felt comfortable with.

    • Ruben Omega

      Kathy, that’s a great story! I hope to do that for my kids. I unfortunately didn’t do that for myself and ended up 50k with student loans (all my fault, I admit), while my wife went to community college first, transferred to the school we met, worked 3 jobs while at school and graduated with the same exact degree, but completely debt free.

    • Shannon_ReadyForZero

      I agree with Ruben – this is an important story and I’m so glad you shared it with us! I strongly believe in listening to your gut – and doing a healthy amount of research. It sounds like you made the right decision for your kids if they’re thanking you now!

      This can be such a frustrating situation. I’d forgotten about it until you shared your story, but when I was in college one of my advisors shamed me for working two jobs while I was in school. She claimed that I wasn’t focused on my education (even though I had top grades) when in reality she was just mad that my work schedule interfered with a class of hers she wanted me to take. Yep, she was not my advisor after that. I would have loved to not work and really enjoy the full college experience, but that just wasn’t my reality. And that meeting only made me feel insecure at not having the money some of my peers did who didn’t have to work. However, I know today that I’m better for it – I definitely picked up some useful time management skills that have benefitted me greatly in the workforce!

    • Holly

      I am a millennial, and I am so annoyed when I hear stories about other millennials who are are “not happy” with the kind of help that you provided them. My parents weren’t able to help me AT ALL, so even my state school tuition set me back a great deal… even after getting scholarships and pell grants. Looking back, I could have scaled back even more and done community college first for 2 years. But seriously… it makes me so angry when people have a good setup like what you gave your kids and they are still pissing and moaning about it. Ridiculous. Don’t get me wrong. I LOVE my generation… but that kind of attitude from students (and their parents, as you described) disgusts me.