Student loans are one of the biggest financial concerns for many Americans, particularly Millennials and Gen Z college graduates. With economic struggles that have made it hard to find well-paying jobs and now rising living costs, a student loan monthly payment averaging $393 can make achieving other financial goals a real challenge. It has left many borrowers wondering if they should pay off their student loans or save for retirement. 

Followers of Dave Ramsey’s Baby Steps system know that he advises paying off all debt (including student loans) before saving for retirement. But with it taking around 21 years for most borrowers to pay off their loans, choosing to focus completely on student loans first can cause a significant setback in your retirement savings. 

So should you pay off your loans or save for retirement? 

Everyone’s financial situation is different, but generally speaking, most financial experts agree that you should do both. 

Why? 

1. Time in the market is the most important factor. The earlier you start, the more time your money has to grow. 

2. Over longer periods of time, the total return on investing in the stock market on average is higher than what you are paying on your student loans. 

3. Successful money management largely is about building habits and systems that will serve you over time. The earlier you develop a habit and mindset of saving for the future, the better off you will be. 

How much should you put toward student loans vs retirement? 

The answer to this depends. At a minimum, you need to be making the minimum payment on your student loans to avoid getting into trouble. In addition, you should contribute at least enough to your 401k to get any match provided by your employer. If you don’t have an employer plan, contribute to a Roth IRA, even if it is only a small amount. 

Beyond that, you have some flexibility in how you allocate funds. 

Here are a few things to keep in mind:

• Investing in a retirement account will be more beneficial over the long term. 

• You can do both. 

• How much your debt bothers you can influence how much extra you pay on your student loans. 

• The higher the interest rate, the more beneficial it is to prioritize student loans. 

Most financial experts advise that 20% of your income should be going to paying off debt and saving for the future. Start by calculating what that amount is. Then subtract your student loan minimum payment and see what is left over. Allocate at least some of it toward retirement and then divide up the rest between overpaying your student loans and saving more for retirement as you see fit. 

Example

A person making $60,000 would want to put $12,000 (20% of $60,000) toward debt payoff and savings. That’s $1000 each month. 

If this person’s student loan payment is $300 and they contribute another $300 to their employer’s 401k to get the match, that leaves $400 that could either be used to overpay the student loan or to save for retirement. 

This simplified math is just to provide an example of how you might think about it. 

What you shouldn’t do is take the advice to pay only the minimum on your student loans as permission to just blow the extra money on whatever you want. What you aren’t putting toward student loans must be saved and invested or it is not worth it. 

And once your student loans are paid off, more money will be freed up to go to retirement. 

What if you don’t have enough money to do both? 

Many Americans don’t have 20% of their income to devote to debt and retirement savings. While you should make that your goal, sometimes it just isn’t realistic, at least not in the beginning. Start with anything that you can do. If you’re only making your student loan minimum payment and saving $10/month for retirement, at least you’re starting the habit of saving. Celebrate that. 

Make it your goal to keep increasing the amount you can save. Every time you get a raise or extra money from a bonus, tax refund, etc, put that toward your debt/savings and keep your living expenses the same. 

Remember, paying off debt and saving for the future are a process and will hopefully become easier over time as you make more money and get better at living within your means.