Many student loan borrowers are torn between saving for retirement and paying down their student loans.
Borrowers often believe they must choose between paying off loans and saving for retirement. After all, every dollar you put towards retirement is a dollar you can’t use to pay down student loans.
What if it was possible to build a retirement and make student loan debt disappear at the same time?
It might sound surprising, but there are at least four different strategies that can be used to work towards both milestones.
Use Student Loan Forgiveness to Build a Bigger Retirement
The federal student loan forgiveness programs can be excellent opportunities to eliminate student loan debt. For borrowers with large student loans and a smaller income, these programs can be life-changing.
Borrowers on income-driven repayment plans can have their remaining balances forgiven after 20 to 25 years worth of payments. Those employed by the government or an eligible non-profit can have their loans forgiven after just ten years of payments.
Unfortunately, there is some risk in chasing after student loan forgiveness. While borrowers should understand the rules of loan forgiveness, there are no guarantees. Even though the concern over the high rejection rates in the media may be exaggerated, there is no denying that forgiveness comes with a bit of uncertainty.
Borrowers worried about qualifying don’t have to skip the program entirely. Instead, they can chase after student loan forgiveness but protect themselves if it doesn’t happen.
One option is to open a savings account as a Plan B fund. Borrowers make the minimum student loan payments as they pursue forgiveness and any additional funds that they have available go into the Plan B account. Going this route allows borrowers to attack their debt aggressively, but also try to maximize forgiveness opportunities.
If it becomes clear that forgiveness won’t happen, the Plan B fund can be used to put a huge dent in the debt balance. If forgiveness does work out, the Plan B fund can be used as a huge head start toward retirement.
Refinance and Build a 401(k) or IRA
Those who aren’t eligible for forgiveness can still lower payments and save for retirement.
Companies like SoFi, Splash, and CollegeAve all refinance student loans for borrowers with a decent credit score and income. These companies pay off the older high-interest loans in full, and a new loan with a lower interest rate is created.
Further Reading: Learn how student loan refinance companies make money.
By refinancing, borrowers can free up some additional cash each month. This additional money can be put towards retirement in a 401(k) or an IRA.
For example, suppose a borrower pays $500 per month on their student loans. They may be able to refinance and get the monthly payment lowered to $350. This means an extra $150 monthly. Instead of keeping this money, they can invest it in an IRA.
Depending upon the terms of the student loans, a borrower can refinance student loans to get them paid off more quickly AND use the additional funds available each month to save for retirement. The key to the process is finding the lowest refinance rates available.
Get Your Employer Involved
One of the best ways to build a retirement is to take advantage of employer matching programs. If your employer offers a dollar-for-dollar match, it means each retirement contribution essentially doubles from day one.
Unfortunately, some student loan borrowers do not take advantage of this program because they feel they need every dollar from their paycheck to pay down student loans and pay for the essentials. (Editor’s Note: Passing on an employer matching program is usually a bad idea as it is essentially passing on free money.)
New legislation now allows employers to tie 401(k) matching contributions to employee student loan payments. In other words, payments toward student debt can become retirement contributions depending on your employer.
Because this is relatively new territory, many employers don’t know about this option, and many others will be hesitant to do so. However, some employers may embrace the opportunity. The matching cost to the employer is the same whether the match is based upon a student loan payment or a retirement contribution.
Discuss with your boss or HR how employers can now match contributions based on student loan payments. Many companies are looking for ways to attract young, talented people, and this could be very appealing.
Turn Retirement Tax Breaks into Lower Student Loan Payments
This is my favorite student loan hack.
Borrowers on IDR plans like IBR, PAYE, and SAVE can lower their AGI —and their payments — by contributing to a retirement account.
As most borrowers know, when IDR payments are calculated, the government usually uses your most recent tax return. The important number pulled from the tax return is the AGI or Adjusted Gross Income. A higher AGI means higher student loan payments, and a lower AGI likewise means lower monthly payments.
Contributions to a 401(k) or a traditional IRA lower the AGI. Accountants call tax breaks that lower the AGI above-the-line deductions. For each dollar that is put in a 401(k) or IRA, the AGI is reduced by one dollar.
If a student loan borrower puts $300 per month in an IRA, their AGI will be $3,600 lower the following tax year. The lower AGI means a lower tax bill AND lower student loan payments. Borrowers can use the federal government’s student loan repayment estimator to see how changes to their AGI would change their monthly student loan bill.
Putting money in a 401(k) or IRA provides student loan borrowers with three primary advantages:
- A lower tax bill in April,
- A lower monthly payment on an IDR plan, and
- A larger balance in their retirement accounts.
It is worth noting that a lower monthly IDR payment can mean spending more in interest over the life of the loan, so borrowers should factor total loan cost into their planning. However, for borrowers who will eventually qualify for federal student loan forgiveness, this option can result in a larger portion of the loan balance being forgiven.
Final Thought: Plan Ahead and Know the Rules
These advanced strategies can be confusing, but they are worth understanding for better financial planning.
All student loan borrowers should familiarize themselves with the terms of their student loans and understand how the debt impacts their finances.
By understanding and planning, borrowers can use these strategies to quickly and efficiently eliminate their debt. They will also be empowered to meet other important financial goals, such as retirement.
Hello
Thank you for this website. I have been trying to get help on my student loan issue, was approved for the first Biden relief but of course it was struck down in court. I have not been eligible for the others. I’m 64, would like to retire due to health issues but still have a balance due in Navient. Summed, I’ve paid twice the original loan balance to now and paid all through covid too. I asked Navient to negotiate a reduction or settlement but they offered me a new loan. How can I get relief from this? I have nothing saved for retirement so financial future is bleak.
Hi Kathleen,
Generally speaking, federal student loans work surprisingly well for borrowers in retirement. I’ve worked with many borrowers who feared they would have to delay their retirement due to student debt, but instead, they qualified for $0 per month payments and a path to forgiveness.
The fact that you had to make payments during Covid has me a little concerned that these are either FFEL loans or they are private loans. If they are FFEL loans, they can be fixed, but private loans will have far fewer options available.
Hello thank you very much for your response. On the payment during covid, I just did that on my own and they did not say no so…I just assumed since I was fortunate to still have a job when millions were let go, I should continue with paying. the loans were (or should have been) standard ones, early on I recall Pell or/and stafford loans.
Mr. Lux, I am on the Public Service Forgiveness Plan with four left as a special education teacher. I have twenty-five years of experience and would like to retire this year in Alabama. After retiring in Alabama, I would like to continue teaching in Atlanta near my grandchildren. Is this possible? I have searched everywhere for some information on this topic, but I cannot find any information.
PLEASE HELP THIS LONELY MIMI!!
I think we should clarify something before I try to answer your question.
There is the Public Service Loan Forgiveness Program, but if you are in that program, your loans should get forgiven after 10 years.
There are also income-driven repayment plans, but you don’t need to be in a public service job to enroll in one of these plans.
What is it you would like to know about these programs?
Is student loan forgiveness possible after retirement (at 70+ years of age)? . . . and how can a person talk with a real, live student loan expert who can answer specific questions, not just talk in circles while reading from a script? Would that person be the Sherpa?
Hi Mary,
Whether or not forgiveness is possible after retirement depends upon whether or not you have federal loans. If your loans are federal, it is definitely possible. Borrowers living on social security have a great shot at getting their federal loans forgiven.
As for speaking to someone, unfortunately, I don’t have time in my schedule to take on individual clients. Instead, I focus on this site to reach as many borrowers as possible.
Best wishes,
Michael