“My employer matched me dollar for dollar up to 3%,” says Risher, now 31 and a marketing consultant who lives (and works) while traveling the U.S. in a renovated school bus. That means that if 3% of his income amounted to $2,000, and he put that into his company-sponsored retirement account, his employer also put $2,000 in. “It is a nice perk,” he says. “I would highly recommend that everyone consider at least doing this, at the minimum.”
For Risher, prioritizing student loans over retirement made sense, and he managed to pay off his debt in 12 months, while making $48,000 as a customer service executive. He broke his debt down into payments of $2,500 a month and lived off the rest of his income: $500 a month.
“I moved into my dad’s basement,” Risher says. “I negotiated a ‘contract’ with them, that instead of paying rent, I would make sure the grass was cut, gutters cleaned and [act as] an on-call babysitter for my younger siblings.”
Once he paid off the balance, he bumped his retirement savings to 15% of his pay. But balancing paying down debt and saving for retirement can cause real confusion, especially when debt levels are high. What’s the best approach, and how do you cover all your bases on a limited income? Here are some strategies to consider.
When to pay off debt
Your approach to student loans will depend on a variety of factors such as the type of loans and the interest rates you’re being charged. In general, you may want to put money where you’re most likely to achieve the best results. If you’re paying off a student loan charging you 3.73% in interest (the fixed rate for undergraduate Stafford loans for the 2021–2022 school year Opens in new window once temporary federal loan relief ends in January 2022), you essentially save 3.73% for every dollar you had been putting toward that loan balance.
On the flip side, if you expect to earn around 6% a year on average on retirement savings over the long term—not unreasonable with a well-diversified mix of investments—you might be better off putting as much as you can toward retirement and making minimum payments on your student debt.
If the interest rates on your student debt are 6% or higher, consider that you can get a federal tax deduction for student loan interest, depending on your income level. If you’re in the 22% tax bracket, that means a loan charging you 6% interest is really like 4.7% after the tax break—so it may make sense to focus on retirement first. Once you’re saving at least 10% of your earnings toward retirement, you can start making extra payments on other loans.
If you’re paying higher interest than that—on private student loans, for instance—you may want to look into student loan refinancing, which can consolidate your debt and lower your overall interest rate. But be cautious: Refinancing federal loans removes all the flexible repayment options that come with federal borrowing. Also note that the student loan interest deduction Opens in new window is currently limited to $2,500 per year and phases out at higher income levels.