How to save for retirement while paying down student loans

Save for retirement or pay down student loans? The options usually seem mutually exclusive. This article will help you do both.

Ryan J. Foley/AP/File
University of Iowa student Angie Platt, 20, is seen on campus in Iowa City, Iowa, Monday, July 1, 2013. You can pay off student debt and save for retirement at the same time.

When you finally start to earn a steady paycheck, you might want to use it to attack your student loans. But that’s not the only financial goal you should focus on once you have some extra money. Saving for retirement in your 20s is crucial; put away even a small amount now, and it will have decades to grow into a strong foundation for when you retire.

Keep in mind that while you’re addressing other areas of your financial health, it’s vital to stay current on your loans and to send the minimum required payment to your student loan servicer every month. The right federal loan repayment plan will keep your payments affordable.

Follow these steps to prepare for retirement while you pay down your loans.

Get the employer match on your 401(k)

No matter how much student loan debt you have, take full advantage of a company match on your retirement plan contributions. When your company offers a match, it puts its own money into your employee-sponsored retirement account, depending on how much you contribute. The most common employer-sponsored accounts are 401(k) plans (available at for-profit companies) and 403(b) plans (offered by nonprofits, schools and hospitals).

Say your human resources representative tells you at orientation that your company offers a 3% match toward your 401(k). That means if you elect to redirect 3% of your paycheck to a retirement account each pay period, your company will put in the same amount. So an amount equal to 6% of your pretax, biweekly pay will show up in your account, even though you contributed only half. You’ll pay taxes on that money when you withdraw it during retirement.

While the company will match your contributions if you put in 1% or 2% instead, you’d lose out on free money if you went that route. Get the full match and you’ll be glad later when you have more in your account than you could have saved on your own.

Don’t have access to an employer-sponsored retirement plan? Set aside what you can spare in a Roth IRA, an individual retirement account. You can put up to $5,500 a year in a Roth IRA if you earn an annual income of $116,000 or less. You contribute to a Roth IRA after taxes have been taken out of your income, so you won’t be taxed on that amount when you withdraw it at retirement.

Prioritize paying down high-interest loans

The decision whether to invest beyond your 401(k) match will come down to how much you pay in interest on your loans. It’s best to pay off loans that carry interest of 7% or more before you put additional funds toward retirement. That will free up money you’d otherwise pay in interest in the future. Once your high-interest loans are paid off, continue to pay the minimum on low-interest loans while you invest.

Or you could use the following rule of thumb when deciding which loans to pay off. The expected average return on long-term stock investments for retirement — meaning the amount an investor’s stocks will increase in value — is about 7% a year (though that can vary widely year to year based on market conditions). So you can assume that’s what you’ll earn on average when you invest mostly in stocks as a 20-something with a 401(k) or a Roth IRA.

Pay off a loan with a 4.29% interest rate, for instance, and you’ll earn 4.29% of your loan’s value each year it’s paid off. That’s less than the 7% you’d earn by investing in stocks for retirement. If your loans have low interest rates, you could make more money if you invest instead, perhaps in a Roth IRA after you’ve maxed out your employer match in a 401(k).

What’s next?

If you’re ready to pay extra toward your loans: Call your student loan servicer and find out how to make a larger payment. In most cases, it’s easiest to log in to your online account and pick the loan or loan group you want to apply your additional payment to. Check out NerdWallet’s tips on how to work with these four loan servicers:

FedLoan Servicing

Great Lakes



Private lenders, including Wells Fargo, Citibank and Discover, have their own systems for applying extra payments toward your loans. Contact your lender to make sure your money goes where you want it to.

If you’re ready to put extra toward retirement: Increase your contributions to your company’s retirement plan beyond the employer match. Consider additional 1% increases to your contributions whenever you get a raise or at the start of each year.

NerdWallet’s resources can also help you pick a Roth IRA account provider if you don’t have a 401(k), don’t get an employer match or have the means to save extra. Make sure to choose a plan with low fees, and with a small or $0 initial account minimum if you don’t have much to put in the account to start.

Most importantly, congratulate yourself for thinking critically about how to spend the money you’re earning now that you’ve graduated. It’s not easy to choose saving for retirement or paying off your loans over vacations or dinners out. But once you’re on the right track with your savings, you’ll feel empowered knowing your future self is taken care of.

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