Learning Center

Back

Competing Goals: Pay Off Student Loans or Save for Retirement?

Many college graduates face a tough decision early in their working lives: pay off student loans or save for retirement. It’s a financial tug of war between digging out from debt today and saving for tomorrow, both of which are very important goals.

Recent graduates might enter the workforce with little more than their diplomas and student debt averaging about $37,000.1 This equates to a monthly payment of $392, assuming a 5% interest rate and standard 10-year repayment term. (For reference, the 2018–2019 interest rate for undergraduate federal Direct Loans is 5.045%.)

IMAGE

As young adults adapt to living on their own, they must juggle their student loan payments along with other financial obligations such as rent, food, and transportation. Let’s face it, putting aside money now to use in four decades may not seem compelling when loans require immediate attention.

The typical repayment term for student loans is a long 10 years. Waiting until loans are fully paid off before starting to save for retirement can mean missing out on years of potential tax-deferred growth in an employer-sponsored retirement plan or an IRA. If your employer offers a match, consider contributing the minimum amount to get the match, then try to increase your contribution amount as you can.

The one thing young adults have on their side is time, and that time is valuable on the retirement front. Consider two adults: One starts saving $300 a month toward retirement at age 25 for 10 years, and the other starts saving the same amount at age 35 for 10 years. After the 10 years, assume the money simply sits in the account until they reach age 65, earning a 5% annual rate of return. Both adults have contributed the same $46,585 amount, but at age 65 the 25-year-old would have $208,130 and the 35-year-old would have $126,368 — a difference of more than $80,000. (This is a hypothetical example of mathematical principles and is not intended to reflect the actual performance of any specific investment.)

What about paying more toward student loans each month to pay them off faster versus contributing those extra funds to retirement? If the interest rate on a student loan is relatively low, the potential long-term return earned in a retirement account may outweigh the benefits of shaving a year or two off student loans.

Realizing the dilemma that many young employees face, a handful of employers are offering student loan benefits, such as a specific amount toward student loan payments or an enhanced retirement plan match when employees contribute a designated percentage of their salaries toward repaying student loans.2 Watch for these benefits to grow in popularity as student debt impacts an increasing number of young workers.

 

Information provided has been prepared from Broadridge Advisor Solutions sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Broadridge Advisor Solutions is not an affiliate of AXA Advisors, LLC. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Advisors nor any of the data provided by AXA Advisors or its content providers, such as Broadridge Advisor Solutions, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Advisors website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through AXA Network, LLC and its subsidiaries.

California Insurance License #: 0E64585 (Powell), 0L27625 (McKenna)

Chares Altizer, James Blassingham, James Denny, Matthew McKenna, & Stephen Powell has earned the Retirement Planning Specialist (RPS) title. The Retirement Planning Specialist title is awarded by AXA Advisors, based upon the Financial Professional's (FP) receipt of a Certificate in Retirement Planning from the Wharton School, University of Pennsylvania. In a collaboration between the Wharton School and AXA Advisors' affiliate, AXA Equitable Life Insurance Company (NY, NY), coursework for the certificate was developed exclusively for AXA Advisors FPs, and the title may be used only by FPs who have completed the required coursework and maintain the title through ongoing continuing education requirements. To verify that an FP has earned and holds the title in good standing, contact AXA Equitable atretirement@axa-equitable.com. Complaints about an AXA Advisors FP should be directed to customer.relations@axa-equitable.com.

Securities offered through AXA Advisors, LLC (212-314-4600), member FINRA/SIPC. Investment advisory products and services offered through AXA Advisors, LLC, an investment advisor registered with the SEC. Annuity and insurance products offered through AXA Network, LLC and its insurance agency subsidiaries. AXA Network, LLC does business in California as AXA Network Insurance Agency of California, LLC and, in Utah, AXA Network Insurance Agency of Utah, LLC. AXA Advisors and its affiliates do not provide tax or legal advice. Individuals may transact business and/or respond to inquiries only in state(s) in which they are properly registered and/or licensed. The information in this web site is not investment or securities advice and does not constitute an offer.

Capital Financial Group is not owned or operated by AXA Advisors or AXA Network.

AXA Equitable Holdings, Inc. is a publicly traded corporation, and it and its subsidiaries are currently using trademarks including the "AXA" name, AXA logo and associated trademarks of AXA SA under license.

Link to axa.com

Privacy Policy

Check the background of this financial professional on FINRA's BrokerCheck
Check the background of this financial professional on FINRA's BrokerCheck