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The resumption of student loan payments last October has put a dent in many Americans’ budgets and derailed as many plans. For instance, 67% of recent college graduates with student loan debt say their student loan debt is preventing them from “participating in major life milestones such as saving for retirement, getting married or buying a home,” according to Fidelity.
There are 44 million Americans with student loan debt, the average monthly student loan payment is $503, and the average borrower takes 20 years to repay their student loan debt, according to the Education Data Initiative. And millennials hold 30.26% of the total debt, with an average balance of $32,800 per borrower.
Against this backdrop, a recent Civic Science survey found that more than 60% of Americans say their loans prevent them from saving money for retirement — and 26% say they are very concerned about paying their student loans.
So what can millennials do to both save for retirement and pay off student debt?
1. Get Your Employer Involved
One of the best ways to help save for retirement while paying down student loan debt is to get your employer involved.
As Patricia Roberts — COO with the Gift of College — explained, employers have a number of easy-to-implement options available to them in order to to support employees who are struggling with student loan debt.
“And let’s face it — employee turnover can be costly, as can the cost of distraction caused by financial stress,” said Roberts. “So, your employer just may be open to lending a hand if you raise yours and express your need for assistance. If you’re not sure what your employer currently offers or would be willing to consider offering, you won’t know unless you ask. You may be pleasantly surprised.”
In terms of strategies that employers may utilize, Roberts said there are a few.
For instance, the 2020 CARES Act, as currently extended, “allows employers to pay up to $5,250 toward student loans on behalf of employees and the employees would not owe US federal income taxes on the payments,” per Morgan Stanley.
In addition, under SECURE 2.0, employers who offer 401(k) and other defined contribution plans can now offer matching contributions to these plans based on employees’ qualified student loan payments, noted Roberts.
2. Budget, Budget, Budget
As Andrew Housser, co-CEO and co-founder of Achieve, noted, budgeting may not sound exciting, but it is the single best way to juggle debt payments, savings and everyday expenses.
“Millennials are now 28-43 years old,” he said. “That means prime parenting years for many, which come with significant expense. Many are also trying to pay for, or plan for, a child’s college education.”
Against this backdrop, Housser noted that the end of student loan forbearances exacerbated already-tight finances. So, a simple budget will allow them to know exactly what’s coming in and going out — and provide perspective on any adjustments needing to be made.
3. Automate Savings and Pay Highest-Interest Debt First
A really effective way to “square the circle” of paying off your loans and saving for retirement is to automate both processes, said Erika Kullberg — attorney, personal finance expert and founder of Erika.com.
For example, enrolling in an automatic transfer into a Roth IRA or 401(k) savings account — and arranging automatic student loan payments so that there won’t be annoying late fees, or a separate mental accounting burden of juggling both debts — is wise, she said.
“Make retirement contributions a non-negotiable fixed cost that just goes out of your account every month and you’ll build your nest egg while also systematically chipping away at your debt,” she said. Kullberg noted that the most effective approach to saving for retirement is taking advantage of an employer-sponsored plan with any feature of matching contributions.
Another important goal, she added, is to pay off high-interest debt first.
“Generally, student loans have lower interest rates than credit card debt or other kinds of personal loans,” she said. “So, if your high-interest debt is more than half your income, paying it down will reduce your overall interest and free up more income to be saved for retirement.”
Once your high-interest debt is under control, you will have more money to use toward retirement savings.
For instance, you can consider the avalanche method for debt payment, which will be the most efficient path forward.
“To do this, organize all your loans by interest rate, highest to lowest,” said Stephen Kates, CFP and principal financial analyst for Annuity.org.You should focus on paying the most to the one with the highest interest rate and pay the minimum to the rest, he indicated.
“As you eliminate each loan, you will have more money to pay off the remainder. Work your way down the list to knock out each one by one,” he added.
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