Think About Retirement When Paying Your Student Debt
Every year for the first part of your life you look forward to moving to the next grade; then you graduate from college, get your first job and the next major milestone is thirty years away at retirement. It might seem like too far off in the distance to think about, but NOW is the time to start planning for retirement.
The average debt for PA School is close to $100,000 and for medical school it is even more; with some reports saying average debt is about $200,000. One recent medical school graduate I was talking with said its closer to $400,000. If you’re like the average student you most likely have student loans and are wondering what’s better: pay off your loans or save for retirement.
Most financial planners suggest saving at least 10 -15% of your income starting in your 20’s for retirement, however this amount is just a general guideline and can vary depending on the age of when you started saving, your lifestyle and the age you want to retire.
Contribute Your Match
If you have an employer sponsored 401k plan the minimum amount you should be contributing is the match amount. If your employer is going to match the first 3%, you should be contributing a minimum of 3%. That is a 100% return on your investment and you will never get that anywhere else, so whatever they are going to match you should be contributing.
What’s Your Interest Rates
The next thing to look at is the interest rates on your student loans. If your interest rate is below your rate of return on your retirement account then the money might be better off invested. If your interest rates on your loans are at 5% but your rate of return on retirement account is 8% then the amount of money you’re earning is going to be more than what you’re spending on the loans, so your money is better off in the retirement account.
Historically the average rate of return on retirement accounts is in the range of 7-10%, of course this is very dependent on how the economy is doing and how your money is invested. Student loan interest rates are usually about 6.8%. Personally my student loan interest rates range from 3%-7%.
It’s hard to predict what the returns will be on an annual basis, but on average over the life of your 401k you can expect to earn 7-10%. During the recession when some 401k earnings were negative that would have been a time to put more money toward student loans as the value of getting rid of the compounding interest on the loans was more than the value of the earnings from a 401k would have been.
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Just Get Your Loans Paid
Sometimes the psychological weight of having debt is too much and it is better to get it paid off. If you feel stressed about how much your student loans are and don’t want to see the monthly payment then it’s probably better to work on getting your loans paid.
Typically, I say do everything in moderation. Don’t put all your money in retirement and don’t put all toward student loans. Depending on how much extra income you have, put a little toward retirement and put a little towards student loans. If you’re close to having all your student loans paid off it might be worth it to get it out of the way so that you can focus on other financial goals.
Other Ways to Pay Off Your Loans
You might be struggling to pay the minimum for your student loans or put anything towards retirement. If this is the case you might be able to lower your student loan payments by applying for an income driven repayment plan.
If you’re currently working for a non-profit organization, as many hospitals would qualify, you could look into student loan forgiveness after ten years of working. This may be a great option to help relieve you of your student debt. If this is the case you may want to lower your payments using an income driven plan so that you can use the extra money to put towards retirement or other saving goals.
If you decide to pursue student loan forgiveness it is good to decide this early in your career when your income is low, as payments on an income driven repayment plan are based on your current income. When you’re in residency and your income is low your payments are going to be much lower and all those payments will count toward the 120 payments needed for forgiveness.
Also, it is good to know that if you do decide to pursue loan forgiveness you are committing to working for a non-profit organization for ten years or while you make 120 payments on you student loans. If you start out working for a non-profit hospital but later decide to work for a private practice your employment with the private practice will not count as a qualified organization for loan forgiveness.
No matter what, always make the minimum payment on you student loans as you do not want to default on these or other loans. It can be stressful thinking about saving for retirement and paying off school loans. Research all your options and take it one day at a time, if you set clear goals you will be able to do both. If you have extra cash to either invest in a retirement account or put towards student loans you have to make that decision on an individual basis and it is best to speak with a financial adviser about your personal situation and financial goals.
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