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The Millennial Conundrum: Save for Retirement or Pay Off Student Loans?

Millennials—the generation of Americans born between 1982 and 2000—now outnumber Baby Boomers.1 And while Boomers are beginning to transition into retirement, many in the younger generation are tackling a dilemma few before them had to face: Save for retirement or pay off student loans?  

When the first Boomers reached college age in 1964, annual tuition for a full-time student at a four-year public institution averaged $1,924 in today’s dollars. By the time the first Millennials turned 18 in 2000, that average was $4,698—and it has risen further since.2 With the increase in college tuition, many Millennials have resorted to loans. In 2016, 69% of seniors graduating from public or non-profit colleges had student loans, averaging about $28,950.3

If you’re trying to repay student loan debt, it’s tempting to postpone saving for less immediate needs such as retirement. Indeed, an estimated 56% of Americans between ages 18 and 29 postpone retirement saving because of student loans.4

This is a problem. When you delay saving, you miss out on the benefits of compounding during those years. Even small amounts can add up to significant accumulated earnings by the time you’re 65.

You shouldn’t have to choose one over the other. With careful planning, Millennials—and anyone else, for that matter—can develop a strategy to tackle student debt while also saving for retirement. Consider the following steps:

1. First, make the minimum loan payments.

The cardinal rule of student loan repayment is: don’t miss payments. Make sure you’re making the minimum payment on every loan and that the amount is manageable within your monthly budget. If it’s not, the Consumer Financial Protection Bureau has resources that describe how you can renegotiate your loan with federal and private lenders.

The important thing is to address the problem quickly. As you repay your loan, you’re establishing your credit history, and your student loan interest payments may be tax-deductible if your adjusted gross income is less than $80,000. So there’s an upside to making minimum payments on time.

2. Next, if there’s money left over, take advantage of your company’s 401(k) match.

Your next priority is to consider retirement savings. Look into your employer’s 401(k) plan—or any similar qualified workplace retirement plan. Some employers match 50 cents to the dollar for every dollar you contribute, up to a certain limit (often 5 or 6 percent of your salary). This “free money” can add up and have a significant impact over time, so if your employer does offer matching contributions, make sure to contribute enough to get the match.

3. No workplace retirement plan? Consider opening up a Roth or traditional IRA.

Even if your employer doesn’t offer a retirement plan, you can still make tax-advantaged contributions to a retirement account. In 2019, you can save up to $6,000 a year in a traditional IRA and get an up-front tax deduction. Alternatively, you can save the same amount in a Roth IRA and forgo the tax deduction today, but enjoy potential tax-deferred growth and tax-free withdrawals on qualified distributions in the future.5

Also, if your income is less than $64,000 as a joint filer or less than $32,000 as a single filer, you might be eligible for a “match” to your retirement savings contributions to a 401(k) or an IRA of up to $2,000 from the IRS through the Saver’s Credit.

4. Put additional funds against your highest-interest-rate loan.

If you have multiple student loans—and assuming no other high-cost, nondeductible debt (such as credit card debt which should be paid off first and an emergency fund)—focus any extra money on the loan charging the most interest. If you’re fortunate enough to have only one low-interest loan, consider making the minimum payment while investing in the market.

While investing involves risks and you could lose money in the market, you may also gain more from investment returns over the long run than you’ll pay in interest.

5. Use windfalls wisely.

Windfalls can be exciting, but they should be managed carefully. If you should get a windfall, whether in the form of a gift, bonus or inheritance, take the time to weigh your options. You could use the money to reduce your student debt and save for the future.

1. U.S. Census Bureau, “Millennials Outnumber Baby Boomers and Are Far More Diverse, Census Bureau Reports,” 6/25/2015.

2. Based on 1964-65, 2000-01 and 2013-14 school years, and expressed in constant dollars as of the 2013-14 school year (in other words, the value expressed in dollars adjusted for changes in purchasing power since 1964). Constant dollars based on the Consumer Price Index, prepared by the Bureau of Labor Statistics, U.S. Department of Labor, adjusted to a school-year basis. For public institutions, in-state tuition and required fees are used. U.S. Department of Education, National Center for Education Statistics, prepared December 2014.

3. The Institute for College Access & Success, as of September 2018.

4. Bankrate, as of 02/27/2019.

5. You need to be over the age of 59 ½ and have held the account for 5 years before tax free withdrawals are permitted.


What You Can Do Next

Juggling student debt can be tricky—but investing in your future is worth it. Millennials—and anyone else—can successfully manage loan repayment while saving for retirement.

  • Schwab Intelligent Portfolios® can help, by recommending an investment portfolio based on your goals, time horizon and risk tolerance. You can also use Schwab Intelligent Portfolios’ online tools, such as the Goal Tracker, to help you set a savings goal and monitor your progress.
  • Get savvy with your finances. Take the time to learn more about investing.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risks, including possible loss of principal.

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochure for important information, pricing, and disclosures relating to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

There is no guarantee that the intended goal will be reached and changes to inputs and other assumptions may affect your potential to reach the intended goal. In addition, the projections and other information you will see here about the likelihood of various outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The projections are based on estimates intended to be representative of the selected portfolio. The output of this tool may vary with each use and over time. The tool does not consider the specific securities or other assets held by you. This tool provides analysis based upon your inputs but makes additional assumptions detailed in the Goal Tracker whitepaper


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