How Do I Save for Retirement with Student Loans?

06/18/2015 11:44 am ET | Updated Jun 16, 2016

When it comes to saving and investing for retirement, many recent grads opt to put it off in favor of repaying their loans first. Between living expenses, student loans, and recreation, it’s tough for young adults to find any money left over to invest in their future.

At Credible, we see student loan borrowers everyday at all stages of their lives seek options to better their finances and get financially ahead. Here’s what we think borrowers should know and some tools to help you start saving for retirement today.

Is student loan debt a negative impact on my finances?

Contrary to popular belief, all types of debt aren’t necessarily bad. Good debt like mortgages or student loans can be used to boost your credit score and establish legitimacy in the eyes of a lender. Bad debt like credit card debt, car loans, or even student loans with high interest rates can rack up interest charges every month, significantly increasing the overall amount you pay over the life of the loan.

The best plan of action is to focus on paying off bad debt as quickly as possible while making consistent payments on the good debt. Dedicating payment towards bad debt with high interest rates will help you save money in interest that can be used to fund your retirement.

Should I direct as much payment as possible to my student loans?

Many young borrowers make the mistake of choosing to save later in favor of paying off their debt first. They look at their student loan debt repayment as a short-term situation and saving for retirement as a long term one. What these borrowers fail to realize is how much money they’re losing out on by not saving early enough. Much like student loans, interest also accrues on retirement savings over the years, meaning someone who invests a small amount of money early on will see their money exponentially grow overtime. Those who choose to postpone saving for retirement miss out on thousands of dollars worth of interest when it comes time to cash out.

Though it’s extremely important to start saving for retirement early, there are situations where it makes more sense to pay off student debt first. If you have a high interest rate on your student loans, it’s likely you’ll be paying more in interest than you’re earning by putting away that money for retirement. In cases like this its best to either pay off the loan as quickly as possible, or look into refinancing to get a lower interest rate.

Tips to Maximize Your Savings

  1. Begin saving ASAP

    The fastest way to maximize your retirement savings is to start early. The faster you start saving money, the more interest will accrue in your account over time.

  2. Build an emergency fund

Most financial experts recommend creating an emergency fund of 3-6 month’s worth of expenses. You never know where life will take you and it’s crucial to have extra money put away for a rainy day.

  • Explore investing options

  • There are many options available to young borrowers for retirement. Check with your employer and see if they offer a defined contribution plan like a 401(k). Those who don’t have a defined contribution plan available to them should explore IRA’s and speak with a financial adviser to map out a retirement strategy.

  • Refinance your student loans

  • If you have high interest rate loans, refinancing can unlock great savings to reduce your interest rate and save on your monthly payment. You can also readjust your payment terms if you would like to extend your repayment in order to allocate more money into your retirement account.

    In order to see how much you can save by refinancing your student loans and start funding your retirement today, visit Credible