Graduating With Debt Affects Student Retirement

Student loan debt reduces the amount of money a student has for retirement, study shows

Shaun Plum
MoneyTips Contributor

Borrowing Student Loans

Graduating With Debt Affects Student Retirement
April 18, 2016

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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Nancy B | 04.18.16 @ 15:05
This really isn't very surprising. Any debt will affect your retirement savings. And student debt is some of the highest that you will have other than the purchase of a home.
Carla | 04.18.16 @ 15:06
It is really sad than trying to educate yourself puts your retirement at risk. I wish more could be done about this.
Steffanie | 04.18.16 @ 15:06
I would have thought paying off the loans would be better. That is really interesting to know about the retirement fund.
Erin | 04.18.16 @ 15:07
This is not surprising at all. With the high percentage rates and the cost of college itself, graduates are in an immediate bind as soon as they leave school. If they can't find a job right away, they're in an extremely tough position.
Jane | 04.18.16 @ 15:07
I still have a student loan from 1998. It's true that it's best to pay off the higher interest rate debts ahead of time, if possible. My student rate loan is 2.875%, so I will keep paying that monthly until it's paid off. It's better to prepay my mortgage which is at 3.75% than my student loan, if I have any disposable income.
Elaine | 04.18.16 @ 15:09
This is sad yet not surprising at all. I think these higher education amounts are just ridiculous.
$commenter.renderDisplayableName() | 11.30.20 @ 22:31