Pay off student loans or save for retirement—can I do both?

Paying off student loans is key to financial wellness 

If you’ve been sending off student loan payments to the government or a private lender, then you know how it can strain your budget. College grads who put that last payment behind them are more likely to say they feel better about their financial situation than those who are still paying.

“Economic Well-Being of U.S. Households in 2020,” federalreserve.org, May 2021.

Until you get your loans completely paid off, you may feel some degree of stress. But if you can stay committed to retiring your school debt while putting something away for your own retirement, you’ll be tackling two hugely important financial goals. That’s something to be proud of. And it can be possible. Consider using strategies like the ones below to help you reach your goal.

1 Save enough to get your full retirement plan match

If you’re eligible for a 401(k) or other workplace retirement plan—and your employer makes matching contributions—then you should consider contributing to the plan. A typical employer match is usually either 50 cents or a dollar for every dollar you put in, up to a certain limit. There just aren’t many ways you can get this kind of extra money.

Depending on your retirement plan’s rules, you may need to work for your current employer for a certain amount of time before matching contributions belong to you—a process called vesting. And any money you withdraw from your plan can be subject to income taxes¹ and, if you’re younger than 59½, tax penalties may apply.

But even if you owe a lot in student loans, it may be worth trying to find the money in your budget to earn your retirement plan match.

2 Include retirement saving in your budget

When thinking about your personal budget, it’s easy to see student debt as a pressing, immediate need and retirement saving as less urgent. But there are important reasons to make retirement saving a priority throughout your career—including the opportunity to take advantage of the power of long-term, compounded growth.

One budgeting hack is to dedicate some of your income to pursuing financial goals. These might include saving for a home, investing for a child’s education, and paying down credit card debt. Retirement saving is another natural fit.

A few points about fitting retirement saving in your budget:

• The automatic nature of saving through paycheck deductions makes it an easy habit to keep.
• Contributing pretax money to your retirement plan can help put a bit more money in your paycheck each month—giving you more to put into each bucket.
• People’s incomes and financial goals tend to change over time—and yours might, too. For instance, as your earnings increase and you pay off your student loans, you should have more to put into your retirement savings.

3 Ask about repayment benefits at work

Some employers might make direct payments to your student loan lender. Others may match your loan payments with direct contributions to your retirement plan account. Both benefits can help make it easier to simultaneously pay down loans and build retirement savings.

How widespread are these benefits? Forty-eight percent of employers say they offer, or soon plan to offer, some form of student debt assistance. Of these current and prospective offerings, 401(k) contributions tied to employees’ student loan payments are number one on the list. So be sure to ask about them.

4 Check out relief programs for federal direct loan borrowers

If you have federal direct student loans, you may have access to some special provisions that could help you more easily fit retirement saving into your budget. For instance:

• Loan forgiveness is available to qualified people working in public service and education, or who are disabled.
• Depending on your income and scheduled repayment amounts, you may be eligible for a lower, income-driven payment plan.
• Loan consolidation might also help lower your current payments—although it might stretch out the term of your loan and the total amount of interest you end up paying.

The U.S. Department of Education’s loan simulator can help you model your payments and compare repayment options.

Note that the opportunities listed above are in addition to the relief provided to federal loan borrowers under the Biden-Harris administration's Student Debt Relief Plan, as well as the extended repayment extension that extends through December 31, 2022.

With a little homework, you can balance student loan debt and retirement saving

Thanks to the convenience, tax-advantaged saving opportunities, and long-time growth potential it can offer, your workplace retirement plan is an important way to help you build for the future. At the same time, it’s important to keep up with your student loan payments and put them behind you.

With some planning, a commitment to retirement saving, even if you start small, and any workplace or government repayment benefits that may be available to you, you can strike the right balance. Later down the road, you’ll be glad you did.

1 Income-tax rules on how withdrawals are handled may vary from state to state.