There is a silently growing epidemic facing people young and old with regards to student loan debt. Besides the fact that this debt is squeezing people to the of point erasing their American dream altogether. There is another problem that’s relatively low on the priority list for so many, but has the potential to become a massive issue.
Student debt holders today must face a dilemma as they journey through their working lives: How do you pay off massive student loans while putting money away for retirement?
The landscape is bleak. As of today, 73% of all college graduates do not go into the field that they studied for at school. Think about what that means. Millions of working Americans saddled with student loan debt are earning an income that does not reflect their education in any way. New graduates working entry-level jobs can’t both save and pay down their loans. In fact, struggling under the weight of debt payments, millions of young adults can barely squeeze enough out of their paychecks to cover basic expenses, let alone invest in retirement savings.
The numbers don’t lie. As reported by the Atlanta Journal-Constitution, an analysis conducted by the LIMRA Secure Retirement Institute estimates that a student loan debt of $30,000 can result in a $325,000 reduction in a worker’s nest egg by the time they reach retirement age. For a loan of $50,000, the net loss can exceed half million dollars!
As of today, roughly 50% of Americans have nothing saved period. Zero. "Nearly half of families have no retirement account savings at all," the Economic Policy Institute (EPI) reported. The median for U.S. families is just $5,000. I want you to imagine what will happen in the next 20 to 30 years, if not sooner, when a flood of Americans has nothing saved for retirement and can no longer work. Remember what I said about this becoming a massive issue?
Why are the retirement savings accounts of Americans with student debt facing such potential shortfalls? The are many reasons, but for simplicity, we can boil it down to three contributing trends:
The skyrocketing cost of education, far outpacing inflation, resulting in excessive student debt.
Stagnated wages for almost two decades, caused by a lack of adjustments for inflation.
Low interest rates on retirement savings accounts, caused by the recent recession.
As a result of these factors, many people today put off investing into retirement until they pay off their student debt, or at least until their wages increase enough that they can afford to do both. This is dangerous for obvious reasons. What if your student debt doesn’t go down but instead goes up? What if your wages never increase?
Both scenarios happen all the time. They’re almost the new normal.
Pay Debt, or Save for Retirement?
If I had to name a fourth contributing factor, it would be the psychology of debt. In America, we’re trained to be good citizens. We strive to be true to our word. As debtors, we believe we should pay off our debts as soon as possible. It seems like every American’s dream is to be debt free. We feel the pressure and stress that come along with debt, and we desperately want it to go away. The pressure to get out of the hole ironically blinds us and prevents us from taking smart action to protect the future.
The “financial experts” say that if you are financially able, you should do both simultaneously—pay the student loan and save for retirement. But consider the psychology of debt and the mental and emotional stress it creates. When someone’s income increases, they’ll feel profound pressure to put the extra cash toward their student loans to pay them off more quickly. While this decision may make them feel better—gets the monkey off their back—it doesn’t make financial sense unless their debt is relatively small compared to the national average or if the interest rates on the loan are exorbitant.
As a student loan expert, I respectfully disagree with these “experts.” I have been saying or rather screaming at the top of my lungs for as long as I have been in the industry: “Never Put Money Toward a Debt That Can Be Forgiven. Instead Put It Toward an Asset That Grows for You and Your Family’s Future!”
In many of my past articles I have written in detail about how to use Income-Driven Repayment to drastically lower payments and combine this technique with Student Loan Forgiveness in order to have a light at the end of the tunnel; a day on the calendar where this loan is completely done, and the monkey is indeed off your back, regardless of how much you have paid toward the loan. This strategy has many benefits but one of the biggest is that it solves this particular retirement problem. You can earmark money in your budget—move it from paying a debt to providing for your future—simply by understanding how student loan debt works.
Finally, others are starting to agree with me on this. According to Forbes, you’ll come out further ahead in the long run by making smaller debt payments and investing in retirement savings simultaneously. It will take longer and may cost more in interest to pay off the debt (depending on the size of the debt and your income amounts during the repayment period) but the amount of growth in your retirement account will more than offset the loan’s additional cost.
Thank you, Forbes. Feels good to finally have other “experts” agree. Sometimes it takes a while for conventional wisdom to catch up with reality.
Keep in mind that I am not a financial advisor. But you will be hard pressed to find anyone who knows more about student loans than I do. That being said, if your student loan payments are preventing you from saving for retirement, or for that matter living your life, your best course of action is to take advantage of every option that lowers your student loan payments as soon as possible. Shameless Plug–at College Loan Freedom, we can show you proven strategies to help you do just that. To learn more, reach out today