When dealing with a significant student loan balance, you might be tempted to pay off your debt as quickly as possible. You may have considered putting your other financial goals on hold, so you can focus on eliminating your debt. But when it comes to saving for retirement, time is your greatest asset so it’s essential to find the right balance with paying down your debt.
Here are some questions to consider when deciding how to allocate money between debt and your other priorities.
1. Are you making required payments on your student loans? You should always make on-time payments to your lender for the full amount due each month. Failure to do so could increase the amount you owe, hurt your credit, and make it difficult to qualify for student loan refinancing.
2. Are you taking advantage of “free” money? Many employers offer matching contributions when you contribute to your 401(k). The amount of this match varies by company and is typically capped at a certain percentage of your income. But whatever your employer is willing to match, it should be the minimum you put into your account; otherwise, you’re leaving “free” money on the table.
3. What is the current interest rate on your student loans? Some professionals who completed grad school in the last decade have student loans with interest rates exceeding 6%. As a general rule of thumb, you should focus on paying down these higher interest rate loans. For loans with interest rates that fall below this threshold, many experts recommend making your required monthly payment and investing what remains in a retirement account.
4. Could you refinance? Another way to tackle high-interest rates is through student loan refinancing, which could potentially lower your interest rate or monthly payment and decrease your costs over the life of your loans. This enables you to potentially payoff your debt more quickly and havemore money to put towards your retirement.
5. Are you already maxing out your retirement contributions? There is a limit to how much you can save for retirement each year. If you expect to easily meet the 2016 limits ($18,000 towards a 401(k) and $5,500 towards an IRA), you might want to use your additional funds to pay off your debt, since you can’t invest any more in these retirement accounts. But if you’re far from these maximums or haven’t opened an IRA, bumping up your contributions is worth considering.
6. What are your other financial goals? Paying off your student loans and saving for retirement probably aren’t the only financial goals you have in mind. You need to balance these objectives with other goals like buying a home, paying for a child’s education, or growing your business. Understanding your overall goals, cash flow needs, risk tolerance, and tax implications can help you craft a complete financial plan. Helping you think through these things is where a private banker might come in handy.
When it comes to eliminating debt and saving for retirement, you don’t always have to choose one or the other. Balancing these priorities is often in the best interest of your financial future.
The strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you “AS IS”, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Clients’ tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.
©First Republic Bank 2016