The Eternal Dilemma: Pay Off Student Loans or Save?
Wednesday, November 7th, 2012
Having more than a hundred thousand dollars in outstanding student loan debt might make some people nervous. Many would be tempted to try to pay a debt of this magnitude off as soon as possible, but focusing on paying off loans at the expense of other priorities can be costly for your retirement plans
, even for young professionals.
To determine the best way to handle your situation, you need to take a close look at your loans. Some student loans can be forgiven
if you work at a qualified public service organization. If that applies to you, don’t be afraid to pay the minimum on your loans and wait until they disappear. If you aren’t eligible for loan forgiveness, however, then your loans aren’t going anywhere; even declaring bankruptcy isn’t enough
to wipe out your student loan responsibility.
One key factor in determining how quickly to pay off your student loans is their average interest rate. According to financial planner Setu Mazumdar, MD, if the interest rate on your loans is less than 5%, then you might be better off making the minimum required payment on them and focusing on investing money for your retirement.
“While it’s admirable to be debt free by paying off your student loans faster, psychologically you probably won’t feel very good knowing that you’ve hardly saved anything for retirement when you’re 45 years old,” Mazumdar explained in an article
for Physician’s Money Digest.
However, there are also advantages to paying off your loans quickly. Once those loans are paid off, your monthly expenses will decrease significantly. Plus, if you aren’t eligible for loan forgiveness and you make a lot of money, you might not even get much of a tax break for holding onto the loan.
So where’s the balance?
Shirley Mueller, MD, a physician-turned-financial advisor, recommends
“paying off high interest non-deductible loans first and low-interest deductible loans second. If your employer has a retirement program that provides matching dollars, prioritize investing in it up to the limit of the matching dollars before paying back the low-interest deductible loan.”
It may seem tedious and boring, but taking the time to create a budget and map out your expected monthly expenses will really help you decide whether you can pay off your student loans and save for retirement at the same time, or whether you’re better off getting rid of the loans as soon as possible.
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