Pay Off Student Loans or Save for Retirement?

Don't ignore your 401(k) while you're paying off student loans

Empty Nester
Photo: Bill Oxford / Getty Images

If you're in your 20s, you may face significant financial challenges that include paying down your student loans while also saving for retirement. Young people may believe they need to choose between their student loans and their 401(k), particularly since other major purchases are on the horizon, such as buying a car or home.

As a result, focusing on long-term goals such as retirement may seem like a distant priority. However, it's important to save for retirement even when you are paying off student loans, and it's more possible than you might think to accomplish both.

Key Takeaways

  • If you're in your 20s, you might be facing the challenge of paying down your student loans while also saving for retirement.
  • Although a typical student loan term can be for ten years, retirement can last 30 years or more, meaning retirement will cost a lot more than your total student debt.
  • Saving for retirement early is as important as paying off student loans because of the impact of compound interest.
  • Choosing the repayment plan that best fits your financial situation will help you consistently pay down the balance of your debt while also saving for retirement.

Paying Off Loans vs. Saving for Retirement

For recent graduates and those in their 20s, deciding whether to prioritize contributing to your 401(k) or paying off your student loans can be a daunting decision. Paying off student debt is an important part of achieving financial stability, while saving for retirement is necessary since we all have to stop working at some point in our lives.

Cost of Student Loans

Unfortunately, student loan debt has been on the rise, with most states reporting that 50% of recent graduates from four-year colleges have student loans that range from $18,350 to nearly $40,000 per graduate.

Also, student loan interest rates can range from 5% to over 7%, and the standard loan term is ten years, depending on the type of loan program. Below is an example of how much a student loan may cost you by the time you're done paying it off.

  • Student loan balance: $30,000
  • Interest rate: 6%
  • Loan term: 10 years
  • Monthly payment: $333
  • Total paid: $39,960
  • Total interest paid: $9,960

In ten years, you will have paid nearly $10,000 in interest for approximately $40,000 in total.

Cost of Retirement

Although a typical student loan term can be for ten years, retirement can last 30 years or more, meaning retirement will cost a lot more than your total student debt, depending on when you stop working and how long you live.

In retirement, you'll need to cover both living and medical expenses (which will increase as you age). Typically, you will need to replace at least 80% of your income. If you earn $50,000 per year, you'll need to save enough to have $40,000 per year in retirement. For a 25-year retirement starting at age 60, you'll need at least $1 million ($40,000 * 25).

There might be other sources of income in retirement, such as Social Security, but it will not likely cover your full living expenses. In 2021, the average monthly Social Security payment was $1,555 or $18,660 in total for the year.

In other words, for 25 years, Social Security might cover a total amount of $466,500 based on 2021 benefits, which is far short of the $1 million needed based on the numbers in our example.

The Power of Compounding

Starting to save for retirement early is as important as paying off student loans because of the impact of compound interest. Compounding means you earn interest on your interest.

For example, if you save $50 per month over 20 years, you will have saved a total of $600 per year, or $12,000 in total. However, if you earned 6% in interest per year and you reinvested the interest earned for the 20 years, you would have $23,000—nearly double the amount you contributed.

Before you begin making extra student loan payments, use a retirement calculator to see whether your savings are on track. Once you are regularly saving for retirement, you can look into making additional student loan payments.

Maximize Your 401(k) Match

If you're in your 20s and have student debt, one of the best ways to increase your wealth is to enroll in a 401(k) and take advantage of your employer's matching contributions.

Many companies offer some type of matching contribution to 401(k) and 403(b) retirement plans. For example, if your company offers a 5% match, it can mean that they'll contribute 5% of your income each year as long as you contribute 5% as well. In other words, the employer match is free money. However, you need to contribute a certain amount or percentage of your salary to qualify for the match.

Even if you have student loan debt, be sure to contribute enough money to your 401(k) to qualify for the employer match. Once you are vested in your retirement plan, the money is yours to keep—even if you leave your job for another company. Also, you may have the option of taking out a loan against your 401(k) in the future if needed.

Know Your Repayment Options

Prioritizing saving for retirement doesn't mean that you have no options for paying off your student debt. You can still choose a repayment plan that makes saving and paying down your debt easier. Your repayment options primarily depend on whether your loans are federal or private.


Private loans are made without federal funds and come with fewer repayment options. You will need to contact your lender, loan holder, or loan servicer to find out your repayment options. Many private loans can be refinanced to lower your interest rate.

Choosing the repayment plan that's best for your financial situation will help you consistently pay your debt while also saving for retirement. If you have federal loans and don't choose a repayment plan, you will be placed on the standard plan, which is a ten-year term. However, you can switch to a different plan at any time.

For many graduates, the best option is an income-based repayment plan, which calculates your monthly payment based on how much money you are earning. On these plans, any debt that remains after 20 or 25 years is forgiven.

There are many other types of repayment plans, which can be based on your income, discretionary income, or how quickly you want the loan to be repaid. Also, you can consolidate multiple federal loans, creating one monthly payment.


If you have a direct loan, you can sign up for automatic payments through your loan servicer. When you enroll in this program, you will receive a 0.25% interest rate deduction.

Financial Steps to Take While Paying Off Student Loans

As you save for retirement and pay off your student loans, you can begin to make progress on other important financial goals.

Pay Off High-Interest Debt

Low-interest student loans or mortgage debt eat up less of your income and are generally tax-deductible. However, debt with interest rates higher than 6%, such as credit card payments, is a bigger drain on your resources and can quickly snowball into a significant financial burden. If you have credit card debt, consider decreasing (but not stopping) your other savings and debt payments until it is paid off.

Create an Emergency Fund

An emergency fund will support you in case of a significant financial setback, such as losing your job or becoming temporarily unable to work due to illness or injury. Your emergency fund should cover three to six months of living expenses. Also, be sure to have some funds allocated to unexpected expenses such as a car or home repairs.

Automatically transfer money directly from your paycheck into a separate savings account. Also, health savings account balances and Roth IRA assets may also be included as part of your emergency fund.

Identify Financial Goals

Student loan payments shouldn’t prevent you from pursuing your life goals. While your budget or personal spending plan may appear challenging, creating a financial plan can help you prioritize how to spend your time and money.

It's important to identify your goals.

  • Do you want to start a family?
  • Buy a car?
  • Buy a house?
  • Move to a new city?

Writing down your short- and long-term goals, while identifying the actionable steps needed to accomplish these goals, will increase your odds of achieving them.

The Bottom Line

Creating a financial plan that is flexible is the first step you can take to assume control over student loan debt. There are ways to fit your payments into your financial plan in a way that doesn’t neglect your need to save for retirement or pursue other important financial milestones.

Frequently Asked Questions (FAQs)

Should I save for retirement or pay off my student loans?

Your student loan debt might be significant, but a standard loan term is ten years, while you'll likely need income in retirement for 20-30 years. In other words, paying your student loans and saving for retirement is essential since retirement will cost more in the long term.

How can I save for retirement while paying my student loans?

Saving early for retirement while in your 20s, even if it's only a small amount each month, can add up because of compounding, which is interest earned on your interest. Also, enroll in a 401(k), if possible, and contribute the minimum amount to qualify for the employer match, which is free money.

How do you consolidate student loans?

To consolidate student loans, you can combine several existing loans into one. This means you only have to make one monthly student loan payment instead of several. While there are certain requirements you must meet in order to be eligible; you can start the process by applying for a Direct Consolidation Loan.

What happens if you don’t pay student loans?

If you don't pay student loans, you will become delinquent, and interest will continue to accumulate. If you default on your student loans, you will face a variety of consequences. These could include collection fees, wage garnishment, federal payments being withheld, damage to your credit score, and more.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. The Institute for College Access and Success. "Student Debt and the Class of 2020," Page 10.

  2. Federal Student Aid. "Interest Rates and Fees for Federal Student Loans."

  3. Buffalo State College. "Financial Aid Office, Monthly Payment Calculator."

  4. Social Security Administration. "Social Security Basic Facts."

  5. Internal Revenue Service. "Retirement Topics - Benefits of Saving Now."

  6. Internal Revenue Service. "Retirement Topics - Plan Loans."

  7. Federal Student Aid. "Choose the Federal Student Loan Repayment Plan That’s Best for You."

  8. Federal Student Aid. "Direct Loan Entrance Counseling Guide," Page 19.

  9. Federal Student Aid. "Consolidating Your Federal Education Loans Can Simplify Your Payments, But It Also Can Result in the Loss of Some Benefits."

  10. Federal Student Aid. "Student Loan Delinquency and Default."

Related Articles