Saving for Retirement vs. Paying Off Student Loans: Which Wins Out?

This is for all the Millennials out there with student loans.  We know you have a lot on your plate. You’re trying to set up your first household, and maybe get married, buy a house, or have kids. Being a grownup is expensive! 

But all that college debt is looming large. What makes the most sense? Fund your retirement or pay off your loans as fast as you can?

You may be tempted to double down on your student debt with the goal of putting that behind you. “Once that’s gone, then I’ll start saving for retirement!” you think.  While that might feel like the right choice emotionally, the numbers tell a different story.

Let’s look at two recent graduates. One makes retirement a priority and only pays the minimum on her student loans. The other decides to pay off her student loans first. 

Let’s say both graduates have $30,000* of debt at 3.7% interest. Under a standard monthly payment plan, our graduates can expect to pay $217 a month for 15 years or $2,604 annually.  (That equates to a total repayment amount of about $39,100.) Now let’s assume each graduate can contribute $5,000 a year to some combination of loan repayment and retirement.

The first graduate (Grad 1) invests $2,500 per year into a retirement plan and puts the other $2,500 toward her student loans. She does this for 15 years, from ages 25 to 40. Then once her loans are paid off, she begins putting $5,000 into retirement annually until age 65.

The second graduate (Grad 2) puts the entire $5,000 a year into her student loans and pays them off within seven years. Then she begins saving for retirement at age 32, again contributing $5,000 annually. 


Both graduates allocated the same monthly payment to student debt and retirement, but Grad 1 is more than $60,000 ahead at age 65. The only difference between the two is time. Grad 1 took advantage of compound interest and gave her money more time to grow.

Now let’s factor in the benefit of an employer match on retirement contributions. Let’s assume their employers offer a 100% match on all contributions, up to a maximum of 3% of their annual income.  If our young professionals earn $50,000 (the average starting salary for 2015 graduates), they can gain another $1,500 per year in retirement contributions. 

Under this scenario, assuming both of our graduates get the full employer match as soon as they start saving, our early saver Grad 1 comes out a sizable $183,956 ahead at retirement time. 


The key takeaway here is that you need to be on a path to repay your student loans while still making your retirement fund a priority. If you have income leftover after paying your minimum debt obligations, the extra money should go to retirement.

The only caveat is that you want to make sure you’re always covering the interest on your student loans, reducing the principal of the loan, and that your student loan interest is less than the long-term rate of market returns (estimated here at 7%). 

Getting rid of college debt has a feel-good factor. But as our example shows, taking care of retirement is a smarter use of the same money.  

*average student load debt for graduating seniors in 2016