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Student Loans, Early Retirement and the FIRE Movement

Student loans make early retirement an even bigger challenge, but it is still possible for borrowers to aggressively save for retirement.

Written By: Michael P. Lux, Esq.

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One growing trend in finance is the early retirement movement, also known as FIRE (Financial Independence/Retire Early). People who subscribe to the FIRE mentality would rather save extra during their working years in order to secure a stable retirement as early as possible. In many cases, the goal is to be retired by 40.

To the average student loan borrower, this concept may seem laughably absurd. If I’m still paying off my college debt, how am I ever going to retire? Retirement at any age may seem like a long shot.

Surprisingly, borrowers with student loans – especially federal loans – have a viable shot at early retirement.

The Case for Early Retirement

Saving for early retirement may be difficult, but the math is pretty simple.

The key to understanding early retirement planning is to look at the savings rate. If you can set aside a large portion of your paycheck towards retirement, you will be well on your way.

The people who spend 100% of what they earn will never be able to retire. The people who can save 100% of what they make are already financially independent.

It is the numbers in between that get interesting:

  • A 5% savings rate means it will take 66 years to retire.
  • A more aggressive 20% means it will take 37 years of saving to retire.
  • Savers who set aside half of what they earn will be able to retire after just 17 years.

These calculations assume $0 in social security and a modest 5% return on investments after inflation.
(Source: Mr. Money Mustache article on the math behind Early Retirement.)

Saving 50% of income towards retirement sounds like a huge challenge, but the reward is retirement after just 17 years.

The Early Retirement Hurdle: Student Debt

Many student loan borrowers are currently paying a large portion of their income towards student debt. The need for things like food and housing make saving extra for retirement a major challenge.

The good news for federal loan borrowers is that monthly payments can be lowered to as little as 10% of their discretionary income.

Smaller payments won’t get the loans paid off any faster, but they will free up extra money each month to save for retirement. The smaller payments can also put borrowers on a path to student loan forgiveness.

Government and non-profit employees can get their loans forgiven in as little as ten years on Public Service Loan Forgiveness (PSLF). Under PSLF, when the debt is forgiven, there are no taxes.

Private sector employees will have to wait 20 to 25 years before their debt gets forgiven. The downside with this forgiveness approach is that the forgiven debt is currently taxed by the IRS, but there is growing support to change this policy.

Supercharging Federal Loan Repayment and Retirement Savings

Income-driven payments are calculated based upon a borrower’s Adjusted Gross Income on their most recent tax return.

Those with access to a 401(k) at work can increase their savings rate and get their student loan payments lowered by contributing extra to the 401(k). The reason this works is that 401(k) contributions are made on a pre-tax basis, and it lowers the taxpayers Adjusted Gross Income.

In short, by putting extra in a 401(k), a borrower:

  1. Lowers their tax bill,
  2. Sets aside extra money for retirement, and;
  3. Lowers their student loan bill.

This triple benefit is an excellent way to handle student loan debt on the path to early retirement… especially for government and non-profit employees.

The same triple benefit also exists for traditional IRA contributions, Health Savings Accounts, and other pre-tax retirement vehicles such as a 457 plan.

Private Student Loans and Smaller Federal Loans

When it comes to smaller federal student loans, chasing forgiveness can often cost more than just paying off the loan in full. With private student loans, the only option is to pay the debt off in full.

The challenge with this debt is that it feels like a no-win scenario. Dedicate your efforts to paying off the debt, and retirement savings get neglected. On the other hand, focusing on retirement means the interest on the student loans will contently be working against you.

The appropriate strategy will depend upon your appetite for risk and the interest rate on your loans.

Generally speaking, low-interest student loans in the 3-4% range will usually be outperformed by investment accounts, so the borrowers with these loans will want to save as much as possible rather than aggressively paying down the debt.

On the other end of the spectrum, borrowers with double-digit interest rates will definitely want to pay down their student loans aggressively. Things are much trickier for borrowers with interest rates in the middle.

Suppose you have student loans with an average interest rate of 6%. By focusing on the loans rather than retirement, you essentially guarantee a 6% return on that money. Invest the money instead, and it could gain far more than 6%… it could also have a negative return.

Ultimately, the best approach will depend on luck. Some years the stock market can return more than 20% and crush the interest generated by the student debt. Other years, the stock market will lose money, and borrowers would have been much better off paying down their loans.

The only certain way to save money on student loan interest rates is to refinance with a private lender. Refinancing federal loans with a private lender means they will no longer be eligible for forgiveness, but it also means better interest rates. Lenders like Laurel Road and CollegeAve are both offering rates under 2.5% to borrowers with a good credit score and debt-to-income ratio. Over 20 nationwide lenders offer refinancing services, so many borrowers can find better rates.

Is Early Retirement Possible with Student Loan Debt?

Like any other financial obstacle, student loan debt will definitely make retiring early a challenge. However, borrowers who are crafty with their planning and aggressive with their savings may find a way to retire early.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

2 thoughts on “Student Loans, Early Retirement and the FIRE Movement”

  1. Is there hope for having to retire early and go on SSD? I just received my SSA award, began receiving early retirement a year ago, have only 6 months left of assistance from disability insurance, have a LARGE amount of federal student loan debt, and am ONLY 54. Is there any hope?

    • The nice thing about federal student loans is that monthly payments are based upon your income rather than what you owe. In theory, it might be possible to retire with a large amount of federal student debt, and then eventually have that debt forgiven.

      That all being said, this approach won’t work in every circumstance. I have a couple of articles that might help you evaluate your options. First, this article on living on Social Security and repaying student debt. It may not all be applicable to you, and much will depend upon how you are taxed on the money you receive to sustain yourself.

      Additionally, while it is possible to eventually have the loans forgiven, you may face a large tax bill at that time.


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