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Should I Pay More Toward My Student Loan Debt or Add to My Retirement Savings?

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For many millennial and Gen Z employees entering the workforce, retirement might feel like it's practically a century away. However, saving for retirement early in your life is one of the smartest financial decisions you can make. In fact, the sooner you start, the further those hard-earned dollars go, thanks to the power of compound interest.

However, many young people are more concerned about student loan debt than they are about retirement planning, and that's understandable. There's over $1.64 trillion worth of student loan debt in the United States, spread across around 45 million borrowers.

Throw in other expenses such as car loans and insurance, and it's not that surprising that adults under age 35 have trouble saving money and don't feel the need to prioritize retirement.

But will holding off on saving for retirement create a long-term problem for young workers and leave them without a future safety net? What should a recent college graduate carrying debt focus on: their loans or their retirement?

Which is better: paying down student loan debt or building retirement savings?

The obvious advantage of making extra payments toward your student loans is the cost savings in interest over time. The longer you continue making only the minimum payments, the longer you'll extend the life of your loan and the more you'll end up paying in interest.

The average college graduate now carries over $35,000 in student loan debt. If you want to pay that off in five years at the average 6 percent interest rate, your monthly payment will be just over $675. By the end, you'll spend an extra $5,600 in interest. If you extend your payoff period to10 years, the monthly payment will be around $388 and you'll pay around $11,630 in interest.

The cost savings is immediately apparent: an extra $6,000 in your pocket if you rush your student loan payments. That's nothing to sneeze at.

But what about the impact on potential retirement savings?

Paying down your student loans at the expense of contributing to a long-term retirement account means you're missing out on the power of compound interest. If you invest just $100 each month into a traditional IRA (which grows about 7 percent each year) from the time you enter the workforce until you retire at age 65, that account, before taxes, will be worth $256,331 when you retire.

If you wait five years until you're done paying off your student loans to start saving, that balance shrinks dramatically to $177,496 before taxes.

That's a $78,835 difference for doing nothing more than starting five years later. If you wait 10 years to start saving, you'll forgo more than $50,000 on top of that.

Balancing your savings goals

Unfortunately, there's no one-size-fits-all answer when you're considering student loans and retirement savings, but the key is making space for both if possible.

If you're carrying a debt load, it's critically important that you keep up with any required monthly payments, as late payments could damage your credit scores. However, if you have money to spare, it's a good idea to put at least some of that surplus toward savings rather than paying down your debt more aggressively. Too often, people fall into a trap where they plan to start saving after they pay off whatever debt they carry without realizing what a long process debt repayment can be. Five years go by, then 10, and they still haven't paid it off. In the meantime, they haven't started saving anything either.

Regardless of your age, it's extremely important not to forego savings if possible. Make both financial obligations a priority, even if your contributions need to start off small. A meager $60 a month can grow into $100,000 in 35 years thanks to compound interest. As you finish paying off your student loans, consider upping your monthly retirement contribution rather than filling your checking account with extra spending cash.

Living debt-free and feeling secure in your retirement are both important goals that everyone should feel they can reach. That means learning to balance the financial strategies needed to reach each milestone.

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