For many college graduates, student loans are a part of life for years and sometimes even decades. In many cases, that student loan debt continues to be carried into our thirties. Eventually, we have to ask if it makes more sense financially to pay down the student loans or focus more on retirement savings.
Those of us with student loans are likely to save half as much money for retirement as those without the debt before the age of thirty. A study done by the Center for Retirement Saving at Boston College discovered that the average college graduate with student loan debt will have approximately $9,100 in a 401(k) by the time we are thirty. People who graduated without student loan debt will have roughly $18,200 in a 401(k) at the same age. The research also found that those of us with debt tend to lean on credit more and are likely to have more financial problems in the long run which may also contribute to a reduced amount or savings available for the retirement years.
Is there a solution for dealing with both retirement savings and student loan debt?
One way that Forbes suggests to tackle student loan debt while still putting money away for retirement is to take advantage of the federal Income-driven repayment plan. It requires the debtor to pay a certain percentage of discretionary income. However, putting money into a 401(k) will reduce the amount of discretionary income available, thus lowering those monthly student loan payments while allowing for retirement savings to continue to grow.
After making regular payments for a number of years, any remaining student loan debt will be forgiven under the income-driven repayment plan. This means that you can enter retirement with savings and with no more student loans to pay, regardless of how much you may have owed originally.
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