In a recent survey conducted by Allianz Life, it was found that 66% of student loan borrowers have had or will have to reduce their retirement contributions in order to restart their student loan payments. Additionally, 82% of borrowers said that their student loan payments will make it difficult to make ends meet. While it is understandable that borrowers are looking for ways to make room in their budget, cutting retirement contributions should be a last resort.
Financial experts advise that if borrowers can contribute anything to a retirement savings account, it is smart to do so, especially while they are relatively young. This is because compounding interest helps investments grow over time, and the longer one waits to start investing, the less time their returns will have to grow. Melinda Satterlee, a certified financial planner, emphasizes the power of compounding and advises that it is better to reduce retirement savings but continue to save and invest, rather than waiting and investing more.
Furthermore, contributing to a retirement account can have additional benefits for student loan borrowers. Contributions made through an employer-sponsored retirement account can lower adjusted gross income, potentially reducing monthly student loan payments. This can be particularly advantageous for borrowers on income-driven repayment plans, such as the Saving on a Valuable Education plan, which calculates monthly payments based on adjusted gross income.
Employer 401(k) matching is another benefit that borrowers should take advantage of if available. It is recommended to contribute up to the full amount that the employer will match, as this is essentially "free money." Starting in 2024, employers will also be able to match student debt payments with contributions to retirement accounts, thanks to the Secure 2.0 act.
While being debt-free may be a priority for many borrowers, a balanced approach to both debt repayment and retirement savings is possible and is considered best for overall financial wellbeing. It is important to find a strategy that works for individual circumstances and priorities.