Should you wait to save until your student debt is paid off?

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Should you wait to save until your student debt is paid off?

To pay it off or to save? If you have student loan debt, you’ve probably wondered whether you should finish paying it off before you prioritize putting away money for retirement, building a rainy day fund, and focusing on other financial goals. 

The answer: both! While there’s no one-size-fits-all solution, building savings while you pay down your student debt is an effective strategy for many borrowers. 

Here are four reasons why student debt repayment shouldn’t hold you back from saving:

1. Saving early is key to retirement success.

When it comes to retirement savings, starting monthly contributions as soon as possible is key to maximizing compound interest — or returns on your investments and returns on those returns — over time. 

However, 41 percent of millennials cite their student debt as the reason why they’ve delayed saving for retirement. With the average borrower taking twenty years to finish repayment, those who delay saving until their student debt is paid off will miss out on decades’ worth of compound interest. 

Even waiting just five years to start saving for retirement makes a significant difference. Case in point: if you save $100 in a traditional IRA with a 7% rate of return each month from the time you start working at age 22 until you retire at age 65, you’ll have earned $279,914 in compound interest on top of your monthly contributions. If you don’t start saving until you’re 27, you’ll have earned $183,184 in compound interest— $96,730 less — by the time you retire.

2. You never know when you’re going to need to dip into your emergency fund.

The pandemic has proven that anything can happen — and building an emergency fund is one of the best ways to prepare for the unknown. Unfortunately, 43 percent of millennials say their student debt has prevented them from starting a rainy day fund. 

It’s true that paying off your student debt as fast as possible can save on interest over time. But if you find yourself unable to afford essential expenses  (like rent, utilities, groceries, transportation, childcare, and pet food) or pay unexpected bills (think a pricey trip to the ER or car repairs), you’ll probably wish you had saved that extra cash instead of doubling-down on your debt paydown.

Plus, once you’ve set aside the recommended three to six months’ worth of expenses, you’ll feel even more confident pursuing other financial goals knowing you’re covered if the worst were to happen.

3. Student debt isn’t necessarily bad for your credit score — and it can even help it.

Student debt does impact your credit score — but that’s usually not a bad thing.

While falling behind on your student loan payments can be detrimental to your credit score, making your required minimum payment on time each month can actually give you a boost. And because student loans appear on your credit report as installment loans — just like auto loans and credit cards — having student debt can improve your “credit mix”, which accounts for 10 percent of your score calculation. In fact, your credit score might even experience a slight drop when you finish paying off a student loan. 

A good credit score has dozens of benefits, from lower insurance premiums and interest rates and perks like eligibility for premium credit cards to making it easier to rent a house or get a job. All of these factors can make it easier to set aside savings and maintain your overall financial wellbeing.

4. You may be able to lower your monthly student loan bill and/or interest rate to make room in your budget to save.

Want to kick your savings to the next level, but can’t find room in your budget? You may be able to lower your student loan payment and interest rate to redirect cash into your savings accounts.

If you have federal student loans, consider whether an income-driven repayment (IDR) plan is right for you. IDR plans cap your monthly required repayment amount to a manageable percentage of your discretionary income, and forgive any remaining student debt after 20-25 years of repayment. 

Refinancing can be a great solution if you want to lower your monthly repayment amount and interest rate, but it also carries some potential risks (including becoming ineligible for federal loan forgiveness programs) and limitations (you usually have to have an excellent credit score and high income).

Ready to get started? Our Reassess tool takes the guesswork out of discovering, comparing, and enrolling in alternative federal repayment plans (including IDR plans) to save the average user up to $326 per month, and Refinance curates and compares prequalified rates from dozens of top lenders to lower the average user’s interest rate by 1.7%.