A new study shows that every dollar in student loan debt a person has at graduation translates into 35 cents less that they will have in savings when they reach retirement age. While many students are optimistic that they will quickly pay off their student loans, few realize exactly what kind of long-term effects this debt has. What is more, few students understand how that debt will affect their credit, and that too is important, especially when it comes to retirement.
While many may assume that paying off their student loan debt as quickly as possible would be the key to saving more, that’s not always the case. Fidelity Investments suggests that rather than paying extra on student loans, graduates should instead put that extra money into a retirement fund. Because those funds will be subject to compound interest, in the long run, the pension will come out ahead. The fact that federal student loans have fairly low interest rates means that the money in savings will grow faster than any interest on the loans, making savings the much better investment.
However, for those who have private student loans, the interest rates are much higher. According to US News, graduates with loans that have rates of 6 percent or more should pay those loans off as quickly as possible. Students with multiple student loans should focus on the one with the highest interest rate first.
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