Student loans vs. retirement savings: which should you tackle first?
According to a recent breakdown by the New York Times, the answer is both.
The class of 2014 carries the highest amount of student debt in America's history, at an average of about $30,000 per student. At the same time, younger generations are increasingly expected to fund their own retirement. This creates a dilemma for young adults trying to set up a savings strategy.
A look at the numbers helps answer the question: Could going to college (and taking on significant debt to pay for it) reduce your ability to save sufficiently for retirement?
Say two people graduate from college at the same time, and start working with the same $45,000 salary and the same raises over time. Person A has accrued massive student loan debt, and spends the next 10 years solely paying down loans, without saving a penny for retirement. Person B, who graduated without any debt, starts saving 4% annually (plus a 4% employer match), increasing savings by a percentage point every year until reaching the annual pretax maximum set by the federal government, $17,500. Person A starts the same saving routine, but begins at age 32, after paying down those student loans.
Both Person A and Person B earn 5% annual returns on their retirement savings. At the age of 65, Person B (who had no student debt and began saving for retirement at age 22) will have saved $1,829,571 for retirement in today's dollars. Person A, who only started saving at age 32, will have $396,039 less.
But the solution isn't necessarily to forgo a college education. If a college graduate with a $45,000 salary simultaneously pays down student debt and saves for retirement (saving a total 8% of income annually), she will save more than a high school graduate earning $30,000 annually, even if the high school graduate also dedicates a total of 8% per year to retirement savings. By age 65, the high school graduate will have saved $1,382,172 for retirement, while the college graduate will have $225,677 more.
There are many options to avoid student loan debt or hone your repayment strategy, from spending two years in community college to taking advantage of Obama's recent expansion of the federal income-based repayment programs. And if you're still skeptical about the benefits of starting to save for retirement early, the numbers speak for themselves.