Mastering the Student Loan-Retirement Juggle

For young savers, saving early for retirement is critical. It means you can take advantage of compounding interest and effortlessly make more from your savings. However, if you have student loan debt, balancing your obligation to pay down loans with your obligation to save for the future can be a challenge. In fact, 84% of people with student loans report that the debt impacts their ability to save for retirement.

The struggle here is real. Fortunately, there are ways to juggle debt and savings to make meaningful progress on both ends. The secret is to minimize the impact of your student debt on your finances while optimizing the dollars you can put toward retirement. Do so, and you’ll find that some strategic saving and planning now will ensure that you’re financially on track for the future, even if you have student loans. 

Dealing with debt

In the U.S., the average student loan borrower owes $35,000 and the typical monthly payment is between $200 and $299, according to the Federal Reserve. For those wondering how they can make their loan payments and simultaneously save for retirement, the first step is finding ways to lower that monthly obligation. If you haven’t already, explore the potential for refinancing your student loan into a lower interest rate. This is a small move that can have a big impact on your finances. For example, if you owe $15,000 on a loan with a 6% interest rate, refinancing that debt into a loan with a 3.5% interest rate saves you $2,148 over the life of the loan. It also reduces your monthly payment by $20 ($240/annually)

Also, consider loan consolidation if you are making multiple payments. If you can obtain a lower interest rate, then you may be able to lower your overall monthly payment. At the least, however, it simplifies your payment schedule. Your ability to refinance or consolidate your loan does depend on your current credit. If you have a poor credit score, then obtaining a lower interest rate or renegotiating your loan terms may be more difficult. Other avenues for lowering your monthly payment include income-driven repayment plans, which base your payments on your income. Additionally, there are federal and state programs aimed at reducing student loan debt or forgiving it all together. For instance, if you’re a teacher, you could apply for a program that forgives up to $17,500 in student debt if you teach in a low-income school for five years. 

The bottom line here: Research your options so that you take advantage of any program or consolidation strategy that reduces your payments or lessens your debt.

Optimizing retirement dollars

Once you’ve done what you can to decrease the monthly burden of your student loans, then it’s time to deal with the other half of the equation: saving money for retirement. First and most importantly, if your employer offers to match retirement savings, do everything in your power to take advantage of those dollars. Personal finance experts recommend that you save between 10% and 17% of your overall income. The average employer match in 2019 was 4.7% of an employee’s salary. Instead of considering a match free money—which may make it easier to dismiss— think of it as an integral part of your total compensation. If you’re not taking it, then you’re effectively ignoring money that your employer planned to pay you for your work. For example, if you earn $70,000 each year and your employer contributes 4.7% of your salary to a 401(k) plan, that’s an additional $3,290 you’ll earn and save. Consider the power of compounding interest on those extra dollars, and the boost to your retirement nest egg is significant.

If you haven’t already, automate your contributions as soon as possible so that the savings become effortless on your end. You’ll save without thinking about it, and your paycheck and budget will adjust to the absence of those dollars. If you don’t have an employer-sponsored retirement plan, open an Individual Retirement Account. Some retirement plans allow you to save pre-tax dollars, which also accelerates your savings efforts. Find ways to contribute to your account such as depositing your tax refund or using a round-up app, which rounds your purchases to the nearest dollar and then automatically saves the rest. 

Managing the margins

With the larger aspects of your debt and savings tackled, shift your attention to managing the finer points of your finances. Finding creative ways to save more in the near-term can accelerate your retirement savings and/or ensure that you’re on track with paying down your debt. 

Conventional wisdom usually advises that you look to cut smaller, ancillary spending from your budget as a way to ramp your savings and improve your personal finances. While forgoing expensive coffees and eating less takeout does help your saving efforts, you want to also look for ways that have a bigger impact from the get-go.

For example, review your biggest monthly expenses and find ways to reduce those standing bills. Do you pay a lot for car insurance? Connect with your broker about finding a less expensive policy. Are your housing costs exceptionally high? Consider a new living situation that saves (or makes) more money, whether that’s having a roommate for a set amount of time or transforming your apartment into an Airbnb on holiday weekends.

Lastly, evaluate your current spending in light of your long-term goals. If you’re determined to save 10% of your income each year for retirement, then putting off a new furniture purchase until after you get a raise may be smart. If you’re committed to paying down your student loan on time, then cutting out the equivalent of $100 of expenses each month (fewer streaming services, public transit instead of rideshares, etc.) can make that goal more attainable.

Tackling student debt is a real challenge for many people. However, with a few smart moves, you can find ways to balance your loan payments, while still making progress toward your retirement savings goals. 

Santander Bank does not provide financial, tax or legal advice and the information contained in this article does not constitute tax, legal or financial advice. Santander Bank does not make any claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in this article. Readers should consult their own attorneys, financial consultant or other tax advisors regarding any financial strategies mentioned in this article. These materials are for informational purposes only and do not necessarily reflect the views or endorsement of Santander Bank.

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