When it comes to taking out loans for college, the common marketing pitch is that you are investing in your future. However, this investment may prevent you from putting money aside for your retirement, which is a literal investment in your future. What can you do to make sure that paying down your student loans doesn’t prevent you from putting money away for retirement?
Student Loan Debt Can Impact You For Years
Student loans can impact your life at any age. If your graduated at age 21, you could be paying off your debt until you are 45 or older depending on how often you delay payments. Some people decide to go back to school later in life or even help their kids or grandchildren pay for school. In that scenario, student loans could prevent retirement itself as well as saving for it. This is why it is important to understand how to save despite facing tens or hundreds of thousands of dollars of outstanding loans. Remember, loans used to pay for school generally cannot be discharged in bankruptcy, which means that they can burden you for your entire life if you don’t have a plan to pay them.
Look Into Income Based Repayment Plans
If you have federal loans, you may be able to keep your payments to a certain percentage of your income. Generally, you will be required to pay no more than 10-15 percent of discretionary funds depending on when you first took out your loans. After 20 to 25 years, the remaining balance is forgiven.
Depending on your income, you may owe nothing on your loans during this repayment period. One issue to keep in mind is that you will owe income tax on any forgiven balance in the year that the balance is forgiven. However, in the meantime, you can use the money that you would have spent paying student loans toward your retirement instead.
Make Interest Only Payments
Another option may be to make interest only payments for several months or years after your graduate. While you will still be responsible for paying your balance at some point, you will have time to save for retirement today and worry about your balance when you have more money to put toward paying down your debt. If you like, you can make partial principal payments to keep your overall debt under control while still allocating some funds for later in life.
Put Bonuses Toward Your Retirement Account
If you get a bonus, you may want to consider putting that directly into your retirement account. In some cases, your employer may actually match your contribution. Additionally, it may reduce the tax burden that you would otherwise face as bonuses may be taxed differently depending on your financial situation. Putting bonuses toward retirement may also help encourage you to save on a regular basis due to accelerated compounding. As you see your savings grow, you can’t help but want to make your account grow even faster.
Never Put Student Loan Payments on a Credit Card
While you may be able to make student loan payments with a credit card or transfer your balance to a credit card, it is a terrible decision. For the most part, you still can’t discharge the debt through bankruptcy, and you will pay a higher interest rate on the debt balance. This means that you could be increasing the amount that you owe instead of paying it down over time. Although charging your payments may provide you with extra cash to put into a 401k, the compounding will generally be less than the interest your paying on your card.
Student loans are a burden that most of us will face for years to come. However, don’t let that stop you from saving for retirement. Looking into income based plans or putting bonuses into your retirement account can help you preserve your financial future even if the present doesn’t look at rosy.