Investing Insights

The Millennial Conundrum: Save for Retirement or Pay Off Student Loans?

February 25, 2016

Millennial Conundrum

Millennials—the generation of Americans born between 1982 and 2000—now outnumber Baby Boomers.1 And while Boomers are beginning to transition into retirement, many in the younger generation are tackling a dilemma few before them had to face: Save for retirement or pay off student loans?

When the first Boomers reached college age in 1964, annual tuition for a full-time student at a four-year public institution averaged $1,924 in today's dollars. By the time the first Millennials turned 18 in 2000, that average was $4,698—and it has risen further since then, to $8,312.2 With the increase in college tuition, many Millennials have resorted to loans. In 2014, 69% of seniors graduating from public or non-profit colleges had student loans, averaging about $28,950.3

If you're trying to repay student loan debt, it's tempting to postpone saving for less immediate needs such as retirement. Indeed, an estimated 56% of Americans between ages 18-29 postpone retirement saving because of student loans.4

This is a problem. When you delay saving, you miss out on the benefits of compounding during those years—and even small amounts can add up to significant accumulated earnings by the time you're 65.

You shouldn't have to choose one over the other. With careful planning, Millennials—and anyone else, for that matter—can develop a strategy to tackle student debt while also saving for retirement. Consider the following steps:

1. First, make the minimum loan payments.

The cardinal rule of student loan repayment is: don't miss payments. Make sure you're making the minimum payment on every loan and that the amount is manageable within your monthly budget. If it's not, the Consumer Financial Protection Bureau has resources that describe how you can renegotiate your loan with federal and private lenders. The important thing is to address the problem quickly. As long as you're repaying your loan, you're establishing your credit history, and your student loan interest payments may be tax-deductible if your adjusted gross income is less than $80,000. So there's an upside to making minimum payments.

2. Next, if there's money left over, take advantage of your company's 401(k) match.

Your next priority is to consider retirement savings. Look into your employer's 401(k) plan—or any similar qualified workplace retirement plan. Some employers match 50 cents to the dollar for every dollar you contribute, up to a certain limit (often 5 or 6 percent of your salary). This "free money" can add up and have a significant impact over time, so if your employer does offer matching contributions, make sure to put in at least enough to get the match.

3. No workplace retirement plan? Consider opening up a Roth or traditional IRA.

Even if your employer doesn't offer a retirement plan, you can still make tax-advantaged contributions to a retirement fund. You can save up to $5,500 a year in a traditional IRA and get an up-front tax deduction, or you can save the same amount in a Roth IRA and forgo the tax deduction today but enjoy potential tax-deferred growth and, eventually, tax-free withdrawals on qualified distributions from the account.

4. Put additional funds against your highest-interest-rate loan.

If you have multiple student loans, and assuming you have no other high-cost, nondeductible debt (such as credit card debt which should be paid off first), focus any extra money on the loan charging the most interest. If you're fortunate enough to have only one low-interest loan, consider making the minimum payment while investing in the market. While investing involves risks and you could lose money in the market, you may also gain more from investment returns over the long run than you'll pay in interest.

5. Use windfalls wisely.

Windfalls can be exciting, but when they come along they should be managed carefully. If you should get a windfall, whether in the form of a gift, bonus or inheritance, take the time to weigh your options. You could use the money to reduce your student debt and save for the future.

Juggling student debt can be tricky—but investing in your future is worth it. Millennials—and anyone else—can successfully manage loan repayment while saving for retirement. Schwab Intelligent Portfolios™ can help, by recommending an investment portfolio based on your goals, time horizon and risk tolerance. You can also use Schwab Intelligent Portfolios' online tools, such as the Goal Tracker, to help you set a savings goal and monitor your progress.

1. U.S. Census Bureau, "Millennials Outnumber Baby Boomers and Are Far More Diverse, Census Bureau Reports," 6/25/2015.
2. Based on 1964-65, 2000-01 and 2013-14 school years, and expressed in constant dollars as of the 2013-14 school year (in other words, the value expressed in dollars adjusted for changes in purchasing power since 1964). Constant dollars based on the Consumer Price Index, prepared by the Bureau of Labor Statistics, U.S. Department of Labor, adjusted to a school-year basis. For public institutions, in-state tuition and required fees are used. U.S. Department of Education, National Center for Education Statistics, prepared December 2014.
3. The Institute for College Access & Success, as of 2/2/2016.
4. Bankrate, as of 11/5/2015.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Investing involves risks, including possible loss of principal.

There is no guarantee that the intended goal will be reached and changes to inputs and other assumptions may affect your potential to reach the intended goal. In addition, the projections and other information you will see here about the likelihood of various outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The projections are based on estimates intended to be representative of the selected portfolio. The output of this tool may vary with each use and over time. The tool does not consider the specific securities or other assets held by you. This tool provides analysis based upon your inputs but makes additional assumptions detailed in the Goal Tracker whitepaper.