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Don’t overlook retirement when paying down student debt

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Decisions

Getting that first student loan bill can be terrifying.  For many borrowers, it is the precise moment the monopoly money of student loans becomes real debt.

For young lawyers, it can lead to an epic panic.  I owe how much?  This can’t be right, who do I need to talk to in order to get this fixed?  Am I going to have to sue somebody?  Will I ever get this paid off?

The unmitigated fear gradually leads to discipline and determination.  Borrowers start to make responsible decisions such as making a budget, and putting a plan in place for aggressive repayment.  Unfortunately, these positive steps can also lead to a mistake.

Start planning for retirement now

At a modest 7% yearly return, $1,000 set aside for retirement at age 25 becomes nearly $15,000 at age 65.  Waiting until age 50 to save that same thousand dollars means that it grows to less than $3,000 by age 65.

The math and the time value of money may make sense, but saving for retirement would seem to be at odds with paying off student loans.  After all, each dollar saved for retirement is a dollar that cannot be used to eliminate debt.

Fortunately, it is possible to kill two birds with one stone—or in this case, work towards two goals with one dollar.

Many young lawyers will find themselves employed by the government or a non-profit and working towards Public Service Student Loan Forgiveness (PSLF).  One of the main PSLF requirements is that borrowers make payments based upon their income on an income-driven repayment plan.  These monthly payments are based upon the AGI from the borrower’s most recent tax return.  Money set aside in a 401(k), IRA, or other tax advantaged account lowers the taxpayer’s AGI.  For the student loan borrower on an Income-Driven Repayment plan, it means a lower monthly student loan payment.

Using this strategy, borrowers working towards PLSF can save money for retirement, get lower monthly payments on their student loans, and have more debt forgiven.  It can really pay to set money aside for retirement.

The perks of early retirement saving are not limited to public servants.  Many employers offer an employer match for their employees.  This means that for each dollar an employee saves for retirement, the employer will also contribute a dollar.  To the employee, it means their retirement investment doubles from day one.  Some employers only make partial matches, and the employer contributions are also usually limited to a portion of the employee’s salary.

Though the terms of an employer match program may vary, the benefit to the employee can be huge.  Those saddled with large student debts may want to focus every penny on debt elimination, but taking advantage of employer matching should not be ignored.

Weighing options

For many young lawyers, handling student debt is the great financial challenge of the present.  For these same lawyers, the great financial challenge of the future will be affording retirement.

Addressing the hardships of the present without creating new hardships of the future isn’t easy, but those with a ton of student debt have already learned a very valuable lesson: it is far easier to plan ahead than it is to look back and wish you had done something differently.

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