Financial Wellness 101: Pay Off Student Loans or Save for Retirement?

Financial Wellness 101: Pay Off Student Loans or Save for Retirement?

We know saving for retirement is important, but for a growing number of Americans, paying down student loan debt takes priority. We’ll discuss why this is happening and what you can do to figure out what makes the most sense for you, whether you’ve just graduated from college or are well into your career. 

We hear a lot about the critical importance of retirement savings. But the price of a college education is skyrocketing, rising almost eight times faster than wages. As a result, student loans have come to dominate the financial picture for a huge swath of the US population.

Virtually two in three young adult job seekers have student loan debt, with the average candidate owing over $33,000. More than a third of millennial employees have student loans. Nearly all of them say that debt makes it harder for them to meet other financial goals, such as buying homes, tackling credit card balances and building emergency funds.

Solutions for tackling that problem are highly sought after. And the topic has launched passionate conversations in the media and political arena. Earlier this year, Democratic presidential candidate Elizabeth Warren made headlines when she called for eliminating student loan debt across the population. 

Unsurprisingly, that conversation has made it to the workplace.

Student loan repayment programs top the list of requested benefit additions from employees. As a result, HR teams are actively searching for solutions, one benefits consultant said at a recent forum in New York.

A growing number of firms have decided to help employees repay their student loans. Accounting and consulting firm PwC launched a benefit in 2016 that pays $100 per month towards employees’ student loans. As of March, about 8,700 employees had signed up. In addition, the number of employers offering student loan repayment assistance has nearly doubled since last year. The list includes big names such as Hulu, Staples and Sotheby’s. 

It’s not only big companies offering this benefit. Marketing agency Fingerprint has found that it helps attract and retain top talent, company founder Ed Mitzen told Benefit News.

In addition to helping employees repay student loans, some employers are also helping them reduce potential loan debt by partially funding master’s degree programs.

What about retirement?

The 401(k) plan still plays a huge role in Americans’ financial lives. Three in five survey respondents say their 401(k) plan is their largest source of retirement savings. Few employers offer pension plans, so the 401(k) and IRA plans remain the most popular saving strategies for amassing a considerable nest egg.

But student debt is drastically changing that picture.

Employees without student loan debt are more likely to have saved $50,000 for retirement. On the flip side, those in debt are more likely to withdraw money from retirement plans to pay for other expenses. That’s generally considered a no-no, since these withdrawals are subject to significant tax penalties

The most crucial factor for both HR teams and employees? When it comes to corporate benefit “perks,” student loan options now lead the way in appeal — overtaking retirement savings offerings. Another survey asked a group of millennials which company benefits would help them achieve their financial goals. More cited student loan forgiveness than 401(k)s. This drives home the significance of this issue, for benefits teams especially.

As an individual, be aware that you can look for employers who offer such a benefit. You can even request it from your organization. If you’re in HR, you may want to consider this type of offering more seriously. (And while you’re benchmarking, check out our list of the steps needed to implement a successful financial wellness program!)

Let’s break it down. Should you focus on student loans or your 401(k)?

“Ideally, you would do both!” says Robb Granado, chief operating officer at student loan provider CommonBond.

When making this decision, Granado explains, it’s important to consider two key questions.

“First, does your employer offer a 401(k) matching contribution?” If so, failing to contribute is basically leaving free money on the table. Say your employer match is 4%. You can put 4% of your salary into your retirement savings and your employer will match that amount. In other words, you get your contribution doubled without doing anything

“Second, what’s the interest rate on your student loans?” If you have a higher interest rate (especially for private loans), you should focus on paying off your loans. The good news? You might be able to lower your interest rate through refinancing. This could help you save thousands of dollars in interest, which you can then put towards retirement.

So you’re ready to cast off the shackles of your student loans. What should you do next?

“The best way to pay off student loans starts with a budget,” Granado says. “Track your income and expenses over time to see where your money is coming from and what you’re actually spending it on. You may be surprised!” 

By getting a better handle on your transactions, you’ll be in a more comfortable place to afford your monthly payments. You should also see if it makes sense to pay more than the required monthly minimum. Before doing so, check any other sources of high-interest debt and their rates, such as credit cards. Don’t forget: you’ll also want to have 3-6 months of living expenses set aside in an emergency fund (i.e. liquid savings). This will cover you in case an unexpected expense comes up, like a home repair or medical costs.

On the other hand, if you’re having trouble paying the monthly minimum on your student loans, explore your lender’s forbearance and deferment options. If you have federal student loans, contact your loan provider to find out if you qualify for Public Service Loan Forgiveness or Income-Based Repayment.

All in all, it’s up to you to decide where your money goes. But having a conversation with a trusted financial coach who knows your situation and money goals can be a great starting point. And given that more and more employers are recognizing student loan debt as a major issue, you can anticipate seeing more of these benefits offerings in the future.

Along those lines, some companies even offer 401(k) match contributions to employees who make student loan payments. That means you don’t have to choose between paying off your loans and saving for retirement. This is an increasingly popular benefit, according to Granado.

“We think it’s the way of the future for employee benefits,” he says.