Which is more important: student loan repayment or investing in a retirement account?

When I graduated from college, I was happy to have my degree and a job lined up – but, even with those two accomplishments under my belt, there came an immediate sense of responsibility. While I was lucky to receive some financial support during my undergraduate career, I still came out with $33,000 in student debt. Add to that a monthly rent payment, a new car loan, utilities, groceries, etc.–and you can understand why paying off my loans became a top priority.

I quickly realized, though, that while paying off debt is a great goal – it couldn’t be my only goal. Even though I was years from retirement, I knew that investing early could pay off exponentially thanks to the extra years of compound interest.

That still left me to figure out how exactly to balance my long-term savings goals with getting student loans off my plate. Ultimately, as with most things, I found the answer is really about finding balance and adjusting as needed based on your current situation.

Whether you put more of your salary toward paying off your student loans or choose to invest into your retirement account, here are a few things worth keeping in mind:

Tip 1: Prioritize loans by rates

It’s not uncommon for your total student loan balance to be spread out over several smaller loans; and if one of these loans has a particularly high interest rate, it can drive your total monthly payment up. As you decide which loans to pay off first, see if you can pay a little extra on the loan with the highest interest rate. If you’re able to pay this loan off early, not only will you save more money in interest – but it can reduce your overall monthly payment.

And the same is true in reverse – if the interest rates are relatively low on your student loans, you may not be in a huge rush to pay it off, leaving you more money to put into your retirement account.

In addition, if the after-tax interest rate on your student loans is higher than the expected return on your retirement savings, you may want to pay more attention to paying off debt. Considering your rates all around can help you prioritize effectively.

Tip 2: Consider employer match

One reason you might choose to prioritize retirement savings over paying down debt is if your employer offers an aggressive match program. With many qualified retirement plans (QRPs) such as a 401(k), 403(b), or governmental 457(b), your employer will match your 401(k) contribution up to a certain level; so if you don’t contribute enough, it’s essentially like leaving money on the table that could help you build a larger retirement fund, faster.

No workplace retirement plan? Think about opening up a Roth or traditional Individual retirement account (IRA) account. With either account, you’ll still be able to leverage the tax advantages associated with these retirement savings accounts.

Also, beginning in 2024, some QRPs and SIMPLE IRAs  may choose to  match student loan repayments.  This is an optional provision so check with your  plan administrator to see if this option is available for you.

Tip 3: Customize your strategy

There’s no one perfect strategy for paying off student loan debt and saving for retirement. The important thing is to look at where you are now and come up with a plan that makes sense for your overall financial situation. But you also can’t set it and forget it. Make sure you’re taking the time to reevaluate your strategy at least once or twice a year. Your situation will change as you get raises, change jobs, take on additional debt, etc. – so make sure you’re adjusting your plan accordingly. Something else you may want to consider is that distributions from a QRP or IRA may be subject to a 10% additional tax if taken before age 59 1/2. 

As for me, after reading success stories about how other new grads had formalized a strategy to help them pay back loans and still save money, I felt encouraged. Some people subscribed to radical saving methods; others took advantage of resources from employers. What I learned is that creating a balance between saving and paying off student debt will look different for everyone — but they’re both equally important.