Student Debt vs Saving for Retirement

Graduating college is a very exciting accomplishment, but for many students, the excitement is dampened when they look at their accumulated student loan debt.  The prospect of making loan payments for a decade or more makes many of them ask the question, “Should I put extra money toward paying my off student loans or invest for retirement?”

In the past, many financial advisors would have advised funding retirement accounts first because the returns on these investments would likely (based on historical data, but not guaranteed) be greater than the interest rate on the debt.  Recently, however, I’ve seen advisors quoted in articles stating that because we are (supposedly) in a “low return environment,” it’s a good idea to pay off any debt with an interest rate of more than 3-5% as fast as possible because the debt interest you’re paying is probably greater than the rate of return you could likely earn on investments.

Even if that were true, there would still be an argument for prioritizing investing for retirement over paying off school loans.  Here are three (but not the only) reasons why it still may be better to put retirement first:

1. Tax benefits.  There are tax benefits to investing in retirement accounts that you generally don’t get for paying student debt interest.  Some tax benefits are available for school loan interest, but the income threshold to receive them is low, and most young professionals with higher incomes don't qualify. 
    
2. Matching contributions.  If your employer offers a 401k match, you definitely want to take advantage of it.  If you don’t, you are leaving part of your compensation on the table – money that increases the returns you can earn on your investments.  You lose that benefit if you forgo these savings and divert funds to extra student loan payments. 
    
3. You can’t get it back.  Student debt is only available to you when you are a student.  Some of your savings should be directed into an investment account that you have access to whenever it’s needed, without any retirement withdrawal caveats (like being 59.5).  If you find the perfect home, need a new car, or any other need for immediate funds, you can’t ask for the extra money that you put down on your student loans back.

No financial decision is right for everyone but for the majority of us, coming up with a schedule to pay off our student debt over a long time frame while saving for future needs makes a lot of sense.