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Don't Let Your College Debt Cost You Your Retirement

January 08, 2016

Don’t put off saving for your tomorrow because you’re too busy paying off your yesterday.

The route to a successful financial future can hold numerous obstacles. For example, things might be complicated for the 41 million Americans who share a chunk of our nation’s hefty $1.2 trillion in student loan debt. That’s more than we all collectively owe in car loans ($955 billion) or in credit card debt ($700 billion).1

The growing population of indebted college graduates may be putting off saving enough for their tomorrows because they’re too busy paying off their yesterdays. It’s not just a dilemma for recent grads. Borrowers in their 30s, 40s, and beyond with lingering loans are still impacted by the financial decisions they made in their late teens. Pre-retirees hold more education debt than ever before, too.

Depending on the repayment schedule, this obligation is a ball and chain that may remain around its debtor’s ankle for 20 years or more. The key is to not let the debt prevent you from tackling the challenges of preparing for what lies ahead. A recent LIMRA Secure Retirement Institute study found that $30,000—the average debt graduates leave school with today—could put borrowers $325,000 behind their debt-free peers when they get to retirement.2


Moving Forward


The harsh truth is all of the financial decisions to attend school were made in the past. There’s no going backward for graduates—the only way to look now is forward. Unfortunately, the path ahead is tougher to navigate than ever before. Today, American workers are getting off to a more challenging start:

  • Millennials are not just beginning their work lives with more debt than any other generation in history, they’re also having trouble saving. The rate for those under 35 is negative 2 percent.3
  • Job prospects for a decent-paying job are not so hot. Nearly 44% of college grads in their 20s are stuck in low-wage jobs, according to Federal Reserve Bank of New York statistics.4
  • Both public and private workplace pensions appear to be going the way of the dodo.
  • Future generations will likely see less generous Social Security benefits than current retirees.

You’ve heard it all before—it now lies on our shoulders to prepare for retirement. But the stats just mentioned show why it’s key to build a personalized approach with a financial professional. 


Fear Not. All Hope Is Not Lost


Here are some ideas to get the conversation started with your financial advisor:

1. Pay the Loans

First and foremost, being delinquent or going into default for not paying loans is not a prudent option. Paying the amount due to the lender each month is a crucial start to not falling further behind. Making sure you’re able to do that is key to moving forward. Is there anything preventing you from doing this?

2. Invest Early

The earlier you begin investing, the better off you may be in the future. Don’t wait until the loans are completely paid off to start saving. If your employer offers a 401(k) plan, and you haven’t begun contributing, it’s a good idea to get started. Every year you put off saving, the further behind you will wind up (Figure 1). Every year we wait, the amount of money we have to save each month increases. And debt-riddled Americans are contributing at a lower rate, if they’re contributing at all. Bottom line: If your employer offers a 401(k) match, contribute at least enough to meet that amount. It’s “free money,” as they say.


Getting Off to A Late Start Could Cost You



This hypothetical chart is for illustrative purposes only and is not indicative of any particular investment.


3. Paying Off Loans Early May Feel Great, but It Might Not Make the Most Financial Sense

As liberating as breaking free from the shackles of monthly payments might feel, paying off your loans faster than scheduled may not be the best option. Depending on your loan’s interest rate and whether you’ve locked it in, it might be wiser to pay the minimum payment and invest the difference.

4. Find an Employer That Will Help Carry a Portion of the Load

The newest perk for attracting top talent: offering to pay a portion of their employees’ student loan debt. A select number of companies have made it part of the package for new hires. It’s only a percentage of the total cost—but if you find an employer who offers this, you can take that saved cash each month and put it toward your investments. If you’re seeking employment, this might be worth checking into while interviewing.

5. Dealing With Other Student Loan Debt

If you’ve already handled your own undergrad debt, the topic may still be relevant if you’ve gone back to school for your graduate degree. Same goes if you are helping younger family members make their way through school. Be smart, and don’t let paying off those loans knock you off track.

Paying off student loan debt but failing to put aside the appropriate amount of money for your retirement can have a significant impact on your future. The decisions you make today about how to deal with yesterday’s liability can either help or hinder how successful a tomorrow you’ll ultimately have. Your financial advisor can help you minimize the negative impact that paying down student loans might have on your retirement savings.

1 Source: “Household Debt Continues Upward Climb While Student Loan Delinquencies Worsen,” Federal Reserve Bank of New York, 02/17/15, www.newyorkfed.org

2 Source: “LIMRA Secure Retirement Institute: $30,000 in student loan debt could mean $325,000 in lost retirement savings,” LIMRA, 11/23/15, www.limra.com

3 Source: “Younger Generation Faces a Savings Deficit,” The Wall Street Journal, 11/09/14, www.wsj.com

4 Source: “Are Recent College Graduates Finding Good Jobs,” Federal Reserve Bank of New York, 06/27/13, www.newyorkfed.org