How does one decide between paying off student loans and saving for retirement? Both are solid goals, both are keys to increasing wealth, but which one should take priority?
Without fail, most financial professionals will have you contribute first to your company’s 401(k), especially if it comes with a company match. It is, in essence, free money and the best instant rate of return you will likely ever get. But even without the company match, in most cases it is probably a better idea to max out your retirement plan and invest in other retirement vehicles before paying down student loans.
It is still important to make the minimum payments on your student loans, of course, but the interest rates are usually quite low, making the interest savings minimal compared to the interest earned on investing your money elsewhere for the long haul. In addition, there are often tax breaks on the interest paid on student loans, further decreasing the true cost of the loans.
That being said, paying off student loans reduces and ultimately eliminates interest payments, which is essentially a guaranteed rate of return, something that hardly exists in the financial world. In addition, eliminating debt has psychological implications as well. Sometimes our peace of mind is just as important as making sure the math adds up!
So in summary, you can accomplish both goals at the same time; however, if you have to choose, focus on retirement, specifically the 401(k) company match. But there is no “wrong” way to go about this. If you feel better about paying off your student loans, that is ok, as long as you don’t leave retirement savings in the rearview mirror.