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The Simple Dollar

Student loans: pay them off or save for retirement?

Student loans can be paid off at different rates. Is it better to finish paying off student loans quickly or start putting some of the money toward retirement savings? Question No. 3 of the Reader Mailbag.

By Guest blogger / May 18, 2011

Amber Sarpy, a recent graduate, enters the financial aid office at Berklee College of Music to make an appointment with staff member Lauren Flaherty in this January 2006 file photo. What's the best strategy for paying off student loans?

Becky Olstad / Staff / File

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries.
1. How much for college?
2. Information security
3. Repay loans? Save for retirement?
4. Investigating a mutual fund
5. New central air while retired
6. Vision coverage
7. Trading by mail
8. Helping Mom
9. Credit type question
10. Habitual borrowing

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Q1: How much for college?
How much do you expect to contribute to your children’s college experience? I’m not a big fan of the idea of paying the whole bill b/c I think they need to take some ownership and I’m also not planning on pushing them to college right away if they don’t show that they have a really concrete idea of what they want to study etc. But I also adored my college experience so I want it to be available to them.
- Andy

Like you, I don’t intend to pay for all of the college education of my children, for several reasons.

For one, I don’t think it’s financially good for myself or my children for me to sacrifice retirement savings for their college education. This causes me to have to work for longer and have a higher likelihood of being a burden on those children when I’m old.

For another, I think there are valuable lessons learned when you’re facing the real cost of a college education instead of just believing someone else is paying for it. Either you have to pay for it yourself or you have to earn it from somewhere.

I do intend to help them significantly with their costs. I’m not going to just write a check, however.

Andy had another question of interest, too.

Q2: Information security
Do you feel like all your online financial interactions (bank accounts, transactions, investments) are secure? I think the movie The Net (with Sandra Bullock)from my college days has had a lasting impact on my confidence with all my information being ‘out there’.
- Andy

There’s virtually no way you can live today without some amount of your information online. Yes, that does mean we all have some small risk of identity theft.

I personally try to minimize that risk whenever I can. I avoid signing up for services that require me to share personal data without providing some enormous benefit in return. Mint is a good example of this, where you’re sharing personal data with a middle man for what I consider to be a very small benefit.

All you can do is be vigilant. Look at your credit report regularly. Watch your credit card bills for strange payments. Don’t slack off with this, either.

Q3: Repay loans? Save for retirement?
I just graduated with my masters, have not found a full time job yet, and am debating what to do with my student loans. I have $67k worth of loans that I start paying in November (given that I find a job). I am going to be a teacher and worried that my salary won’t be enough to cover the monthly loan payment unless I consolidate or do the income based payment plan. I also obviously want to start saving for retirement as soon as possible. However, I also realize that extending the life of the loan will mean owing a lot more in the long run. Should I try to make the regular payments and pay them off in ten years? Or is that too unrealistic?
- Ellen

Your first priority is to find a job. Don’t worry about choosing between retirement and student loan repayment yet. A bird in the hand is always worth two in the bush.

Once you have that job, I would make sure that I was picking up all of the matching funds from my employer. For example, if your employer offers a match on the first 4% of your salary, contribute 4% so you can get that match. After that, I would contribute enough so that your total contribution including matches is 10%. Beyond that, I’d hammer on the student loans.

If you don’t find a job, keep those student loans in forbearance. While this won’t help with the overall cost of the loan, it will help you from getting behind on your debts.