Retirement Saving Vs Paying Off Student Loans
Unpaid debt is undoubtedly stressful given the opposite scenario of financial stability once you are completely debt-free.
Around half of borrowers face the dilemma of whether to focus on clearing student loans or saving for retirement.
As per expert financial planners, planning to reduce a student loan balance is great, but thinking about retirement saving is also crucial.
While student loan lenders will always alert borrowers about unpaid amounts every month, there is rarely someone available to explain the point of saving carefully for retirement.
Ultimately, every debt is different and focusing more on paying student loans rather than retirement saving is not relevant, it Is emotional.
Why Borrowers Tend To Prioritize Student Debt Over Retirement
Most borrowers prioritize student loan debt repayments for the following reasons:
- Urgency - Who wants to live with the constant reminder of necessary debt repayment? Genuine borrowers generally feel like it is vital to return the owed money as quickly as possible. Moreover, lenders constantly notify borrowers about unpaid debts and warn them to pay it back right away. To avoid these uncomfortable situations, borrowers prioritize student loans more.
- The Constant Weight of A Debt - The thought of owing money to someone does not let most borrowers sleep peacefully. Besides, the next thing that comes to mind is the growth of the interest amount which will eventually increase the total principal loan amount. In fact, it is the single-most discouraging aspect of the borrowing experience.
- The Desire To Be Debt Free - This aspect is somewhat related to being in debt. When the borrowers feel the burden of due debts, the first thing they want is to clear all the unpaid debts. They might know that they are being emotional, but for them the only thing that can bring peace is exiting from debts.
Changing The Paradigm
The thought process varies by individuals, but it is extremely important to look at the larger picture.
- Money needed for retirement is more than the amount typically owed for student loans - You have to understand the fact the unpaid loan is already spent and unless you save a secured amount for retirement, the need for taking a loan may re-appear. Now you need to determine which process will be more difficult: repaying the debt or saving that money? The faster you start saving for retirement, the better the outcome.
- Nobody knows when they really will retire and should have emergency funds for early retirement if needed - Work-life is very uncertain; you never know what is waiting for you tomorrow. Unless you are prepared to deal with it, you along with your family may suffer from unforeseen circumstances. If you have enough savings, you can continue leading the same life without many major adjustments. Accordingly, focusing on retirement instead of student loans is often more critical.
- Student loans have low interest rates and therefore are not urgent - Based on your educational degree, the principal amount of student loans and their interest is evaluated. Generally, the student loan interest rates are considerably lower than the other financing types. You can mark the loan less urgent if it comes with an interest rate of 4 to 5%. In that case, you can transform your focus from “paying off the debt” to “saving for retirement”.
How Do I Decide?
The decision to pay off the loan or to save for retirement is directly dependent on your financial situation.
Here are some pointers that can help you better analyze:
- Decisions have to be made very carefully especially when your retirement and due debts are associated. If you ask for a solution from the professional financial advisor, they will recommend you examine the interest rates. The interest on both private and federal student loans is usually less.
- If the loan comes with a longer time limit of 30 to 45 years until your departure from work, you could conveniently arrange to cover the interest through a long-term investment portfolio which yields higher returns than the annual loan interest.
- Loans that come with a higher interest rate should be treated as an urgent priority. In that case, you need to prioritize both the retirement savings and paying the unpaid student loan before subsequently rebalancing the effort depending on how financial conditions evolve over time.
Taking steps emotionally can disrupt your entire financial steadiness. Therefore, before undertaking any initiative to comprehend the appropriate balance of saving for the future and repaying an unpaid student loan balance, make sure to take suggestions from financial advisors.
Above all, the thing that you should think deeply about is about post-retirement. Your responsibility toward your family will increase and unless you start saving for retirement now, the process only gets harder over time.