To save for your sunset years or quickly clear your student loan? How to decide on what’s important
Which is of these is a priority: paying off your student loan or saving enough to secure a comfortable life after retirement? Regardless of your answer, one thing is clear – both financial goals need to top your priority list. But it can be difficult to decide which one to take on first.
Should you pay down all your student loans with all the little money left in your coffers? Or, should you amass enough money and “store” in your cash reserves until retirement?
Do both. Make sure to prioritize on saving for retirement while working towards repaying your student loan. When you prioritize it means making little but regular payments towards each financial goal. Not only does this guarantee financial freedom in the future, but also reduces your loan debt while growing your retirement money. It is a win-win.
If you’re still undecided on where to put your extra dollar, this post will help you get the most of your money by providing ways on how to prioritize (on what’s important).
Weigh up interest rates
The first step is to evaluate the interest rates you are paying towards your student loan. Are they high? Can you compare the rates with the investment you going to get when you save for your retirement?
One thing is certain, clearing your debt is inevitable. At some point in your life, you will have to pay off student debt. And the more you contribute towards reducing a student loan, the earlier you’ll reduce the interest rates. If you have close to three decades to your retirement, it will take you years before you can entirely accomplish your financial goal of saving for retirement or clearing off student loans.
Remember, the higher the interest rates, the lower your chances of investing for your retirement. So it is better to strike a balance while evaluating the interest rates.
Take your tax bill into consideration
By investing for retirement, you may be eligible for tax advantages. Make sure to take into consideration these advantages at your disposal.
Depending on the type of account you own, if you’ve saved enough money for your retirement, you are eligible for a tax break irrespective of whether the money goes in or out. With a company retirement plan or the conventional 401 (k) plan account, you stand to earn pre-tax money. This is tax-free money is only accessible during your retirement.
Any contributions you make in your 401 (k) plan account guarantees you a savers credit especially if you’re a low-income earner who saves consistently.
Depending on your gross income, and contributions you make towards your retirement, savers credit will vary especially if you are filing contributions jointly with a spouse. For individuals, contributions can amount to $2,000. While for married couples, the contributions number sits at $4,000
There’s no reason why can’t take advantage of these deductions to make savings, despite having high student debt (with high-interest rates to boot). Conversely, you can work towards paying interest rates on your debt to stand a chance of tax deductions.
The IRS can deduct up to $2,500 when you pay down your student loan within a year. This is an option, however, is only applicable to low-income earners. If you’re a high-income earner, you are not eligible for these tax deductions.
As long as your income is below the provided threshold, you can enjoy a deduction of interest rates on your student loan as a way to reduce your debt (for good).
Take advantage of refinancing options on your student loans
Consider opportunities at your disposal to lower interest rates when paying down your student loan. If you are still undecided, make a quick decision right away.
A plethora of borrowers are paying off their student debt at interest rates of 6% and 8% respectively. Well, a considerable number are still paying off realisticloans at higher interest rates. Some refinancing options than equally bring down those percentages to as low as 3% and 4%.
Put it simply, do not ignore your student loan debt. Instead look out for any credible refinancing options that can lower your loan interest rates. You’ll be surprised there’s a workable plan for you.
Take, for instance, seek financial assistance from a private lender to offset your federal student loan. This could greatly provide room to create flexible plans to make repayments without you loan having to accrue high-interest rates. You can get viable financing options with competitive interest rates from:
- First Republic Bank, etc.
Offsetting your loan through financial assistance from a private lender excludes you from the loan forgiveness program. Lenders are often offering credit options with low-interest rates, which are highly attractive. So you can get alternative financing options for your student loan without having to pay high-interest rates. However, you need to have a high credit score and maintain a certain bank balance.
Listen to your gut feeling
However fleeting, your gut feeling can help you make wise considerations. You don’t have to rush to what is pleasing to everyone, or mathematically correct. Consider your gut feeling prior to taking any financing options for your student loan.
On the flip side, invest in your retirement while making plans to reduce your debt over a given period of time. Let nothing rush you. It is perfectly okay to prioritize saving for retirement before you can make plans to pay off your student loan.
There are many variables to consider. So, you have to consider your financial status. Probably you have other credit card loans to pay off with higher interest rates to boot. You could focus on reducing your credit card debt as opposed to your student loan interest rate.
However, take time to review your financial situation before taking on a decision. Listen to your gut feeling all the time. If you’re unsure of whether to save for retirement or pay down your loans, there are tools to help you evaluate the benefits you stand to gain if you take either option Payitoff and Student Loan Hero is such tools designed for people like you.
Saving for your sunset years and paying down your student loan are two financial goals that most individuals take up years to accomplish. If you’re unsure of what to do first, or which financial goal to deal with fist, it is important to balance between the two.
Prioritize on what is important first. Learn to evaluate what are the best financing options you have at your disposal to give you better returns based on the decisions you make. To put it another way, make sure to evaluate interest rates of your student loan vs those of retirement investment. But remember, paying off your loan is inevitable regardless of the rates.
Remember to take into account your tax bill does enjoy potential tax deductions on your student loan debt. Deductions can go as high as $2,500. Also, take advantage of the opportunity to refinance your student loan. And don’t forget to listen to your gut feeling however fleeting it is. If you consider these options, you’ll find it easier to prioritize on what is important.
Photograph by Low Jianwei