Pay off student loan before starting retirement savings?

Hez · #1 (**permalink**) 07-06-2007, 03:48 PM

Hi everyone, I'd like your advice on something.

Here's some background information:

I graduated last month, which I'm thrilled about but it also means that I have to start thinking about paying off my student loan (Canadian). I don't have to start paying it back until November, but interest has already started ticking away on my balance (it started in April, I believe).

Total, I had about $30K in loans, but managed to pay off $17K before April (thanks to saving money from working/scholarships/bursaries/education plan/extra student loan $ I didn't need). So that leaves about $13K left.

I'm not too worried about the student loan repayment. I'm not sure what the interest % is, but I know it's a lot less than other loans and that the interest is tax deductible.

Here's what I need some advice on:

My plan was to pay off that student loan on schedule, again I'm not sure what the percentage is or what the monthly payments are, but I'm not too concerned about it.

In the meantime, I have been itching to start a retirement plan (rrsp). I'm 23 and feel like I have time on my side for planning for retirement--I don't think I'll ever earn the big bucks but I'm good with money so I have the urge to sock some money away for my golden years.

Anyway, my mom asked her finance go-to guy about me starting up an rrsp, and he suggested that I pay off my student loan first. I was surprised at this, because I could be in my 30s before my student loan is paid off, and that seems like a long time to wait. I have no idea what % an rrsp would earn, and know it can vary, but I imagine it would earn more than the interest I'm paying for the student loan, right?

--I'm probably just confused because I don't know the hard numbers for all this stuff!

I always thought it would make the most sense to pay down my student loan while simultaneously contributing to a retirement plan, rather than concentrating all my efforts into paying down the loan. What are your thoughts?

Hedy · #2 (**permalink**) 07-06-2007, 03:51 PM

In the interest of full disclosure, I'm saving while paying down my loans, but I think it's award-winningly foolish not to start saving until 30 if it's not a hardship for you.

Cassandra · #3 (**permalink**) 07-06-2007, 05:59 PM

I think you should start the retirement plan now. Put what you can into it-even if it's only $50 a month. As your income grows and your student loan gets paid you can add more into your retirement fund.

As you said, you have time on your side. I would take full advantage of that!

Cassandra

humandraydel · #4 (**permalink**) 07-06-2007, 08:32 PM

Quote:

Originally Posted by Hez

I have no idea what % an rrsp would earn, and know it can vary, but I imagine it would earn more than the interest I'm paying for the student loan, right?

Essentially, it comes down to this. If you earn more on your investments than pay in interest on your loan, it makes sense to save for retirement. Typically the interest rates on student loans are low and retirement plans offer some sort of tax advantages, so it makes sense to fund a retirement plan before paying off a student loan.

cptacek · #5 (**permalink**) 07-06-2007, 09:05 PM

I think you need to get some more information to make an informed choice. The main things I would look at are:
1. Does your job offer you a retirement plan that matches anything that you put in? If so, start the plan.
2. How much is the interest rate on the student loan? If it is less than, say 6%, then start saving for retirement.

I have another question...why will it take you 7 years to pay off $13,000? You have been scrimping and saving to pay off the larger balance; why can't you continue that for a few more years and do both?

Another thought...get inertia on your side. Starting something and stopping something are usually the hardest parts...doing the same thing becomes a habit, and is the easiest thing to do. So, start the retirement fund so you get used to saving for your retirement. It is easy to move the amount up, but if you wait a while before beginning, I think it will be harder to get it started.

Finally, you say you are itching to get started. Scratch that itch! That is a great itch to have. It's not like you are itching to buy a brand new car. For your peace of mind, I would start investing.

disneysteve · #6 (**permalink**) 07-07-2007, 08:31 AM

I would, and I did, save while repaying my loans. I graduated med school with $102,000 in loans. I paid them off over 13 years (12 years ahead of schedule) but simultaneously built a 6-figure investment portfolio.

Bottom line is it would have made more sense to not pre-pay the loans and take the full 25-year repayment schedule. My investment portfolio would have grown much better, but I hated having the loans. I didn't still want to be paying for my education when my own daughter was in college.

So I say do both. Pay the loans AND invest for retirement.

humandraydel · #7 (**permalink**) 07-07-2007, 10:14 AM

Quote:

Originally Posted by disneysteve

So I say do both. Pay the loans AND invest for retirement.

Just don't forget to be explicit about two things: the type of loan and the interest rate on the loan. There are some private student loans out there with variable interest rates of 9-12%. Even some federal loans are up to 7.5%. At these interest rates it may make sense to pay off the loan first.

On the other hand, my loan is consolidated at 3%. Not only that, but I went with the "interest only" option for the first 2 years. Plus, soon I'll be going back to grad school part time and will defer my loan for 3 more years. So, 5 years after graduating I'll finally begin to pay the loan...but by that time, inflation will have helped me a little

Aleta · #8 (**permalink**) 07-13-2007, 03:56 PM

If you're working for an employer that will match your contributions, by all means don't delay contributing to this. Your employer is giving you free money. I think that you could pay on both. You are young and if you start saving now, you won't have to save as much if you wait to sta rt contributing. It would be easy to say get rid of this or that, but I think that your retirement plan shoud ALWAYS come first even before contributing to children's educational funds.

Hez · #9 (**permalink**) 07-14-2007, 11:51 AM

Unfortunately, my employer doesn't have any plan that would match my contributions. But you all make good points. I'm going to contact the financial guy next week to talk about setting my savings up.

Hez · #10 (**permalink**) 08-05-2007, 11:25 AM

Well, it looks like I won't be starting retirement savings any time soon, after all. The interest for my student loan is higher than I thought, a little under 9%, so I'm going to wait until the loan is gone first. I'm disappointed, I'll be honest.

But on the plus side, this gives me a kick in the pants to get this loan gone asap!

Aleta · #11 (**permalink**) 08-06-2007, 05:04 PM

Do you owe alot on your student loan?

JasonEngler · #12 (**permalink**) 08-20-2007, 09:15 PM

Pay yourself FIRST...ALWAYS! Pay the minium on your student loans and get your retirement account going! Don't default on your student loans, but don't rush out and pay them off immediately either!

mekish · #13 (**permalink**) 08-20-2007, 09:31 PM

If you live with parents and focus all your extra income on the loan, it wouldn't take you that long to pay off 13k. so, i think its best to pay off the loan so you're free!

moneymatters · #14 (**permalink**) 08-26-2007, 06:48 PM

Hi Hez,
I'm a 20 yr old college student with $22k in student loan debt. One of the well known posters recommended the following book for me to read, and I think it may help you as well:

The Complete Idiot's Guide to Personal Finance in Your 20s and 30s (pg 171 -186 talks about investing)

Maxed Out: Hard Times, Easy Credit, and the ... - Google Book Search

Hope this helps!

moneymatters · #15 (**permalink**) 08-26-2007, 06:52 PM

Oops (Silly Me!).

Please forget the link in the fore mentioned post. Here is the proper link:

The Complete Idiot's Guide to Personal Finance ... - Google Book Search

loanstar · #16 (**permalink**) 08-30-2007, 08:56 PM

at 23 you do have plenty of time to start your retirement fund. Considering that the debt on the loan will rise due to interest rate, i think its better to pay it off now, this will also help improve your credit rating which you will need if you plan to get a mortgage in the near future.

parafly · #17 (**permalink**) 08-31-2007, 09:40 AM

Even though the interest on the student loan is at 9%, I would still recommend paying off the loan and saving for retirement at the same time. The earlier you start with saving for retirement, the better off you will be in the long run. While 9% may seem a bit high, the interest paid on the loan is tax deductible which will benefit you greatly.

If you can be more aggressive in paying off the student loan and still save for retirement at the same time, definitely take that route.

Snodog · #18 (**permalink**) 08-31-2007, 10:00 AM

I think your doing the right thing by attacking the SL first. Your getting 9% return on your money risk free. Plus it will give you an incentive to get rid of it as fast as you can.

5carrots · #19 (**permalink**) 09-02-2007, 02:20 PM

I am currently in a similar situation, recent college grad with over $20k in SL at rates between 5-7%. To be honest, as I'm working towards my CPA, being surrounded by several CPAs/CFPs has taught me the value of Compound Interest. Need I stress...Compound Interest! With that being said, I completely agree with parafly. Save for retirement while simultaneously paying off your SLs. Regardless of the fact that you may be paying a 9% interest rate on SLs, a Roth IRA invested correctly will allow you to achieve significant returns through compounding. Time = $$$.