You’re a wide-eyed fresh college graduate with a degree in your hand and dreams in your head. Fierce and unfazed, you’re fired up to take risks and make something out of your life. A job opportunity that makes your heart leap or a new start-up that will allow you to invest in your passion—whatever it is, you’re confident that it will work out.
And for most of us, it does.
Soon enough, you start a family of your own, so work harder to make ends meet. You still don’t shy away from hard work, but you’re getting a little old and tired of the everyday 9-5 grind. That’s when it hits you—you’re closing in on your retirement with each passing year.
So you chart out a plan to save money and keep it aside to live a comfortable and relaxed life with your partner, as you say goodbye to your kids who are embarking on their own life. Doesn’t it sound like the perfect fairytale?
There’s just one thing missing—the overbearing debt of student loans.
According to the Consumer Financial Protection Bureau (CFPB), the number of borrowers over the age of 60 have climbed by 20 percent from 2012 to 2017, and the numbers are still on the rise. This indicates a trend of economic hardship for millions of older Americans—which may not sit too well with their retirement plans.
The mere idea of paying off student loans while saving up for retirement can fill you with dread. You may think of it as an ‘either-or’ situation, but we’re here to tell you that as challenging as it may be, saving up for retirement while paying off student loans is doable.
Let’s take a look at the primary reason why student loans are clashing with retirement plans and a few ways Americans can save for retirement while eliminating student loans, including student loan financing.
Why Are Americans Heading Into Retirement With Student Loan Debts?
While some older adults in the United States took out student loans for their own college degrees, most didn’t do it for their higher education.
Reports show that around 73 percent of older Americans under student loan debt co-signed loans on behalf of their child or grandchild, whereas only 27 percent did it for their own degree.
Co-signers of loans find themselves in a tight spot when the loan recipients fail to follow through on the agreed-upon payment schedule. This makes them liable to make the payments as if the loan had been theirs alone.
Pay Off Your Debt And SaveFor Retirement
If you don’t want to be stuck in a pickle where you have to choose between saving up for retirement and paying off your student loan debt, here are a few ways tips.
Use Student Loan Forgiveness Programs
Federal student loan forgiveness programs provide students excellent opportunities to eliminate their debt if the borrower has a smaller income and a larger student loan.
Borrowers who subscribe to an income-driven repayment plan can have their remaining balance forgiven after 20 to 25 years of payment. If you’re employed by the government or an eligible non-profit, you can get the balance eliminated after ten years of payment.
As great as it may sounds, there are risks in chasing after student loan forgiveness. There’s no way to know for sure if you’ll be selected for the program with a high rejection rate. Hence, it isn’t safe to rely on it solely.
Try to be smart about it and set up a savings account if things don’t work out. If you do get selected for the program, the savings fund can function as a substantial head start on your retirement, and if it doesn’t, at least you’ll have something to fall back on.
Get Your Employer Involved
One of the best ways to save up for retirement is to take advantage of employer matching programs. If you get into a dollar for a dollar program, it means that each retirement contribution essentially doubles in saving.
Most borrowers don’t take advantage of this program as they’d rather take every dollar from their paycheck and use it to make monthly repayments of student loans. While that may seem viable, theIRS tells us that employers can link 401(k) matching contributions to the employee’s student loan payment.This essentially means that an employee can use their student loan payments to maximize their employer’s contributions to their 401(k).
If you don’t know whether your organization offers this option, head down to HR and inquire about it so you can make the most of it.
Turn Retirement Tax Breaks Into Student Loan Payments
Federal student loan borrowers on the income-driven repayment plan usually have monthly repayments calculated based on the AGI (Adjusted Gross Income) in their tax return.
A higher AGI means higher student loan monthly payments. You can reduce your AGI if you choose to contribute to a 401(k) or a traditional IRA. Both of them will break the AGI to give you a lower value, which would ultimately lessen your required monthly payments for student loans.
If you apply for the student loan forgiveness in addition to this contribution, you can get a large portion of your loan balance forgiven quickly.
Refinance Your Loan
Perhaps the best and safest of all these options is loan refinancing.
Refinancing is offered by private lenders that allow you to consolidate your federal and private loans so that you can pay them off at a lower interest rate. The new interest rate for the loan repayment depends on your credit scores.
Essentially, the private lenders pay your loans for you, giving you one consolidated amount that you owe them for a specific period. This allows you to pay your loan faster, make smaller monthly payments, and save more—which could work out perfectly for your retirement plans.
You can choose the repayment plan and select your own repayment schedule. You can also opt for larger payments and a shorter time if you can afford to cut down on other costs, pay back the loan entirely, and start saving for your retirement.
Battling a mountain of debt while handling the pressure of retirement savings is downright debilitating. But a few smart financial decisions can make the process substantially easier.
There’s a range of great tools and techniques—like the smart tips we’ve highlighted for you—to eliminate loans and save for retirement simultaneously easier.
Refinancing is the ideal solution for those who don’t want to choose between doing one thing and the other.
So if you’re ready, start by comparing rates and work with a well-reputed and experienced lender such as Education Loan Finance (ELFI) to pay off your student debt while enjoying some peace of mind and saving money for retirement.
Learn more about ELFI’s loan refinancing options here.