Student loans (or college savings) vs. retirement:
Which should you tackle first?

By Kelly Greene, TIAA Senior Director and co-author of the New York Times best-seller The Wall Street Journal Complete Retirement Guidebook
Three hundred thousand dollars.
 
I stopped in my tracks when my running partner confided the amount she had borrowed for medical school. It came up because she’d just started her residency, meaning she was finally getting a paycheck and benefits, and she was trying to figure out whether to pay off her student loan debt before she started to save for retirement. Or was she supposed to do both at the same time—and how?
 
Parents often face a similar quandary—do you postpone saving for retirement until you have enough put away for your kids to go to college? It just doesn’t feel right to put college savings second, no matter how many times you’re told there’s no financial aid for retirement.
 
It’s possible, and in most cases the smart choice, to save for retirement while tackling other financial goals. It really comes down to some simple math: Retirement savings are designed to grow over time, so getting started earlier is the best strategy.
 
And it may mean postponing other goals, from home renovations to vacations or new cars. So yes, paying down debt and saving for the future is a challenge, but it’s worth it. Here are some ways to help get you started:
 
  1. Save enough to get the match.
Many employers will match a portion of what you contribute to your workplace retirement account. The amounts vary, but a typical formula is something like 50 percent of your first 6 percent of pay. So, if you don’t put in your share, you could be leaving money on the table. But if you do, you’ve automatically doubled your investment. One note: Many employers are cutting expenses to preserve jobs in these challenging times. And that may mean they temporarily suspend their match. But in past downturns, as the economy recovered, employers largely restored those benefits.
 
  1. Pay attention to the tax impact.
It’s easy to lose track of a largely overlooked benefit to saving part of your pay in a pre-tax account:  You’re lowering your overall taxable income—and maybe even lowering your tax bracket. That’s particularly meaningful if you live in a state, or even city, with relatively high income taxes. And when you contribute those  pre-tax dollars to your 401(k) or 403(b) account, you may be surprised at what little impact it has on your take-home pay.
 
Also, keep in mind that your investments have the opportunity to grow, free of tax, until you make withdrawals in retirement. So if you don’t expect to stop working for 30 years or so, your savings can benefit, tax-deferred, from  compound interest. Compounding happens when earnings on your savings are reinvested to generate their own earnings. In turn, those earnings are reinvested to create more earnings, and so on. Over time, it can add up.
 
  1. Explore ways to wrangle the debt.
You may be familiar with the federal Public Service Loan Forgiveness (PSLF) program, designed to reduce the burden of student loan debt for people who work for public interest employers like universities, hospitals, the government and not-for-profit organizations. But did you know that there are services designed to help you keep track of its many requirements? Some employers are starting to add such services as an employee benefit.
 
For example, TIAA recently launched a student-debt solution with technology startup Savi designed to help employees of nonprofit organizations reduce their monthly student loan payments now, and to qualify over time for relief from the balance of their federal student loans by enrolling in the PSLF program. During a nine-month pilot with seven nonprofit institutions, employees who used the solution were on track to save $1,700 a year on average in student debt payments. They also had an average projected forgiveness of more than $50,000 upon successful completion of 120 months in the PSLF program.
 
  1. Consider a tax-deferred way to save ahead of time.
Parents trying to save for retirement and college tuition should consider using tax-advantaged 529 college savings plans. As with workplace retirement plans, 529s offer a wide range of investments—many offering the same “set-it-and-forget-it” strategy as target-date funds for retirement, typically using your child’s freshman year as the target date.
 
The investments grow tax-deferred inside the plan, and when used for qualified education expenses, withdrawals are tax-free. You can open a 529 account on behalf of a child, grandchild—or yourself, if you are planning to go back to school. Some states offer an income tax deduction, reduction or credit for the money you contribute, so it’s worth checking out where you live.
 
  1. Help your money go farther.
Also, keep in mind that the federal CARES Act allows student-loan payment deferrals for those with federal loans who are impacted by Covid-19. But if you can still make the payments right now, it’s a great opportunity to get ahead. The interest rate is zero through Sept. 30, so all of the payments could help pay off your principal.
 
Saving for retirement while paying off your student loans—or for a child’s education—is a balancing act, but it’s achievable. Seeing ways to get more out of saving without much impact on your take-home pay made it easier for my friend to feel comfortable tackling both at once. She’s long since finished her residency and is now a married physician at a busy practice with her first child on the way.
 
I’ll bring up 529 plans on a run with her sometime soon. But first, we get to celebrate with a virtual baby shower.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
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