Prioritization: Retirement Savings Plans Versus Student Loan Debt Repayment
Millennials have heard it time and again: save, save, save! The inability to plan and save for retirement remains a constant source of anxiety and concern for people with student loan debt. In fact, 80% of people say that student loans impact their ability to save for retirement, and why shouldn’t it? People with student loans are routinely reminded and, in some cases, harassed about their repayment obligations – so much so, that an entire branch of law has opened up to protect people from student loan debt harassment. In this blog article, we will take some time to consider how the employer student loan repayment assistance program works in relation to other benefit options – specifically, retirement savings plans. In understanding how these programs work as a comprehensive menu of benefit options, we can better understand the true value and potential real-life impacts of the program.
Facing difficult choices
This psychological focus on student loan debt repayment forces people to neglect other aspects of their financial life, including saving for retirement. I don’t know about you, but this terrifies me. I consider myself among those individuals who simply don’t have the freedom or luxury – and yes, it is a luxury – to be able to save for retirement. Start early, they tell us. Time is your friend. Time may well be our friend, but there are so many interests out there vying for our time that it’s difficult to know where to begin.
Offering an employer student loan repayment assistance program essentially presents eligible employees with an additional benefit option. It’s one item on a complete menu of benefit options. So here’s the question: are indebted employees better off selecting the repayment assistance program or a traditional retirement savings plan like a 401(K)? For millennials and others with student loan debt, this can be one of life’s most pressing issues. Should I focus on paying off my student loans or should I save for retirement? Often times, students can’t do both simultaneously. Life is a trade-off.
Retirement planning versus student loan debt repayment
We have already taken a look at how retirement accounts – like the 401(K) and the Roth Individual Retirement Account (IRA) – work, but how do these programs fit together within the larger framework of a benefits menu? Remember, in order for the student loan repayment assistance program to work on an employer branding level – or any level for that matter – it must provide some real-world value to the employees who participate. So does it? Are employees better off choosing to participate in this program over contributing to a retirement account?
As with all of life’s dilemmas, there is no simple answer. It just depends. Thanks to the wonder of compounding interest, it is in every millennial’s best interest to start saving for retirement as early as possible. According to most financial planners, millennials should plan to save at least 15% of their salary, including a company match if available, for their retirement.
By the same token, there is an argument to be made for paying off student loan debt as quickly as possible and making that goal the priority. Mark Cuban highlighted the key point of this argument in a recent interview with MarketWatch about credit card debt: “The best investment you can make is paying off your credit cards, paying off whatever debt you have. Whatever interest rate you have — it might be a student loan with a 7 percent interest rate — if you pay off that loan, you’re making 7 percent. That’s your immediate return, which is a lot safer than trying to pick a stock or trying to pick real estate, or whatever it may be.”
Key factors to consider
There are some key questions to consider when prioritizing student loan debt repayment and retirement savings. The first thing to consider is whether the company you work for offers a 401(K) match at all. Most companies that offer a 401(K) plan have an accompanying employer matching program – about 78% of them. The way these programs work is the employer contributes a certain amount to your 401(K) savings plan. Typically, employers will match a percentage of employee contributions up to a portion of the total salary. In some cases, the employers will match contributions up to a particular dollar amount, regardless of salary.
Let’s get one thing clear: employer matching is free money – that’s right; it’s 100% free! Having access to this type of benefit is, in a certain sense, a no-brainer. Foregoing participation in this type of retirement savings plan means you are leaving free money on the table, and that’s not good. It’s definitely something to consider when prioritizing your options. If an employee works for a company that does not offer 401(K) matching, there’s less incentive to prioritize retirement savings over student loan debt repayment. But, that’s not the only factor to consider.
The other factor to take into account is how long it will take to pay off the entire student loan debt amount. Different people are at different stages in their repayment process, and this bears weight on the issue of prioritization. If there is a chance of paying off your student loan debt within a reasonable time, there is greater incentive to make that your priority. Get it over and done with, so to speak. There’s something to be said for the emotional and psychological benefit of paying off your student loan debt, which studies have shown to have a tangible, monetary consequence.
Income-driven repayment plans
There is no hard and fast rule for what constitutes a “reasonable” amount of time, but I would submit that 10 years is a good benchmark for making such an assessment. There are some folks – God bless them – who simply cannot hope to pay off their student loan debt within this timeframe, and that’s okay. Their financial priorities will be different. Switching to an income-driven repayment plan may be ideal for these people, and if they do that, they will almost certainly want to participate in a 401(K) plan if possible.
In an income-driven repayment plan, a debtor pays a percentage of their annual discretionary income. After making these payments for about 20 to 25 years, the remaining debt balance is forgiven (although the IRS does consider forgiven debt to be taxable income, paying a percentage of the loan debt amount sure as hell beats paying the full amount). The contributions one makes to a 401(K) plan serve to reduce one’s discretionary income for the purposes of calculating the required payments to be made. The more you contribute to your 401(K) account, the less you have to make in payments to your student loan debt account. It’s sort of like killing two birds with one stone.
As you can tell, how one prioritizes their debt obligations in relation to retirement savings varies from situation to situation. There are contexts to be considered. Life is hardly ever a black-and-white affair. In this sense, the employer student loan repayment assistance program should be viewed as an economic tool with potential use in a variety of personal financial circumstances, though not in all circumstances. It is, in a word, an option.
This brings up another important point about the benefit: employers are able to take full advantage of the potential usefulness of this program when they are able to couple it with an educational component. Providing guidance and planning tools along with the benefit allows employees to make an informed decision as to whether this program can help their particular circumstances. In the right situation, the employer student loan repayment assistance program can change a person’s life for the better, and that makes it all worth it in the end.
I’m a 32-year-old writer based out of San Antonio, Texas, with my own mountain of student loan debt to conquer. When I’m not working, I’m either out for a run on the trails or chilling at home with my rescue dog, Vincent (for Van Gogh, my favorite painter). I like to eat (a lot), read (I’m a real horror junkie, with Stephen King topping my list of favorite writers), watch movies (Titanic – yes, Titanic – is the be-all and end-all for me), drink wine (red only, please), travel (Italy has my heart and always will), collect crystals, meditate, and read tarot cards. Perpetually single, but a softie deep down, I try to stay true to my hippie heart and find the good in every person and situation. I remain curious and open to learning new things (except for math which, I am convinced, will always be my downfall). If I can answer any questions about my work here on student loan debt and repayment assistance programs, feel free to shoot me an email. I don’t bite (usually). [email protected]
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