If you're the parent of a soon-to-be-college student — or a soon-to-be-student yourself — you might want to sit down for this.
According to research from Edvisors, the average indebted graduate will walk off campus having to repay a little more than $35,000.
The repercussions can be wide — and lasting. Indebted college students are putting off many of life's major milestones, including buying homes, getting married and having kids because of this financial burden. And now, new research from Morningstar’s HelloWallet shows, that hefty loan bill seems to postpone saving for retirement as well.
After looking at its user data and the Federal Reserve’s Survey of Consumer Finances (and controlling for age and income), HelloWallet found higher levels of student loan debt to be associated with lower levels of retirement savings. More specifically, each additional dollar of student loan debt is associated with a decrease in retirement savings of 17 cents, according to the HelloWallet data. Use the Survey of Consumer finances data and that decrease becomes 35 cents.
“Common wisdom is that all debt is bad and you should focus on repaying debt as fast as you can, but there can be a very real cost to that,” says Jake Spiegel, a HelloWallet researcher. Is there a better way to approach this situation?
Saving for retirement is mandatory
In the ongoing battle between saving for retirement and paying down student debt, the end result is that one doesn't trump the other. Don't approach repaying your loans as the sort of financial endeavor you need to go all in on. It's okay to stick to the schedule you've been given from your lender or go on an income-based repayment plan in order to make room for retirement as well.
The goal needs to be, eventually, putting away 15 percent for retirement (including matching dollars form your employer). If you can't get there today, that's okay. Save what you can and try to bump up your contributions 2 percent a year until you're hitting the appropriate levels.
Matt Reiner, CEO and co-founder of Wela Strategies, a fee-only adviser, says a lot of people are overwhelmed by their student debt — that it’s some kind of quicksand that’s never going to allow for the footing to save for retirement or even retire at all.
“Alleviate that psychological burden, along with doing the fiscally right thing, by saving even just a little for retirement,” says Reiner.
Aim To Max Out
It might sound like a good idea to put any extra money towards your debt, but “It’s not advantageous in any circumstance to pay off student loan debt ahead of schedule,” says Spiegel, especially if there’s an employer-sponsored retirement plan available. If your employer offers one — if anything — make sure you’re contributing enough to get your employer's match. (This year, workers under 50 can contribute a maximum of $18,000 to their 401(k)s, and older workers can contribute as much as $24,000.)
And if you can, try raising your contribution by $100 a month. It’ll cost you $30,000 over the next 25 years, but it will amount to nearly $100,000 more in your nest egg (assuming an 8 percent annual return). If you don't have a 401(k) or similar account available, look at an IRA, Roth IRA, or the myRA — or My Retirement Account — a starter retirement account developed by the U.S. Treasury Department.
Refinance To Save More
If you haven’t looked into whether you can refinance your student loans — and according to research from Citizen’s Bank, more than half of eligible grads have not — then it might be worth doing, adds Reiner. According to SoFi, a marketplace lender that provides student loan refinancing, its customers save an average $14,000 by refinancing their loans.
First, understand what types of loans you have and what the interest rates are. You can look up your federal loans on the National Student Loan Data System at nslds.ed.gov, and call your private lenders if you need the information from them.
Both banks and non-banks are now in the business of refinancing loans — and you can find rates for as low as 3.5 percent on fixed rate loans. Then, take the difference between your old and new payments and have it automatically contributed to your retirement account.
--- with Kelly Hultgren