Paying Off Debt vs. Saving: 4 Steps to Help Choose

Written by: Kristyn Pilgrim
Updated: 1/22/20

A 2018 survey found that 51% of recent and soon-to-be graduates had student loan debt. While many people think paying for higher education will pay off in the future, students graduating in 2018 had an average of $22,919 in debt.

With the expectation of landing a job after graduation quickly, many students believe they can repay their debt in less than 10 years. But the reality is, many struggle to budget bills and student loan payments on low starting salaries. Rather than paying off debt in the expected 6 years, the average college graduate takes nearly 20 years to repay their student loans.

Right after graduating, it can take some time to get the job you want. With proper budgeting, some students may spend the first two or three years after college paying the minimum on their loans. However, as you work your way out of entry-level positions, you will likely become more experienced in saving and investing — for retirement, a house, or even for another degree.

Should you focus on paying off your original student loan debt and wait to pursue anything else? Or should you continue to pay the minimum, and put extra money toward a retirement account or mortgage?

Everyone has an opinion on the best process when it comes to paying off debt or saving, and ultimately, the decision is personal. While some may choose to do both, others may not feel comfortable taking on more financial responsibility while still having student loan debt.

This four-step guide can help you determine what works best for you.

Step 1: Think about what you are saving for.

Once you have a steady job that allows you to pay rent, buy food, cover your bills, and pay your monthly loan payments, credit card payments, or other debts, you may start thinking about personal goals.

Whether it’s saving for retirement or buying a house, many people pursue other financial investments while simultaneously paying off student loans. However, it can be a financial stretch, so it is crucial to budget first. 

  • Homeownership: Millennials are buying homes less than older generations, mostly because they don’t feel financially ready. In several cities, renting tends to be a better option than buying a house; however, there are still many housing markets where the monthly mortgage payment is less than rent.

    There are also personal benefits of owning a home. You do not have to worry about your mortgage payment skyrocketing and having to move; you can stay in the same place for decades; and you can make changes to your home as you see fit, not as a landlord allows.

    Buying a house is also a worthwhile investment. The National Association of Realtors notes that home prices have gone up about 6.5% every year since 2015, so buying a house now can pay off in 15 or 20 years.

    Before you buy a house, it is essential to save up money for the down payment. That means you will have to budget money away from paying off other debts, like credit cards or student loans.

  • Retirement planning: As you get older, you will reach a point when you are not able to work anymore, or simply don’t want to. When that day comes, you want to know you have a safety net so you can continue living comfortably.

    Financial advisors recommend you set up a retirement plan as soon as possible, but few young adults begin this process on their own. These days, it is more common for employees to set up retirement funds in their 30s or 40s and put as much money as they can into the account.

    If you are a recent graduate and thinking about retirement savings, the first step is to see what your employer offers. They may have matching 401(k) plans, which allow you to deduct some income from your paycheck and have the amount matched by your employer.

    If your job does not offer this program, you can sign up for an independent retirement plan through a bank. You will be responsible for putting your own money aside into savings, and the interest rate will be much lower.

    Employers may not offer a sufficient retirement plan to their newly hired employees. Before accepting a job, look at the offered benefits upfront. These may also include some debt forgiveness on your student loans, which can help you pay down debts faster. 

If you are deciding between paying off your debt or saving for the future, look at the cost of living in your area and the benefits your employer offers. Determine how these can impact how quickly you pay off your student loans.

Step 2: Determine how long you need to pay off current debts.

If you have small student loans, especially private loans with high interest, it may be worthwhile to pay these off first. You can take that money and put it toward a savings account for later. If your student loans are significant, you may choose to pay the minimum each month and put extra money into a savings account to pursue other goals without worry.

To take down the cost of student loans, particularly federal student loans, you can pursue some form of debt forgiveness. Student loan forgiveness programs with the federal government consider your job or volunteer work to determine if you’ve worked for the public good and qualify for a loan reduction.

However, federal loans also tend to have lower interest rates than private loans. Paying off loans with high interest faster can help you feel more financially secure, so you can move forward to owning a home, saving for retirement, getting married, or pursuing other personal savings goals.

The monthly payments you make on your student loans may be tax-deductible. This can determine if you decide to pay off student loans first or save for the future while paying off debts at the same time.

The longer you spend paying off your student loans, the more you will pay in interest. Paying them off as fast as possible means you spend less on your education in the long run and can shift your focus to other saving goals sooner.

If you cannot get debt relief, create two different budgets: one in which your income focuses on repaying your student loans, and one in which you split some of your income between paying off your loans and saving for personal expenses. Then, decide which plan works better for you.

Step 3: Think about how much you need to save.

Many people struggle to save (even to keep a small personal savings account) because they do not routinely put money aside, or budget their paychecks accordingly.

Once all of your bills are paid, and you have spent some money recreationally, you may find yourself with only a few dollars left until your next paycheck. This is not only a stressful situation, but it can also make saving in the future more challenging, as you may rely on credit cards to make ends meet.

Financial advisors recommend saving strategies, including: 

  • Use direct deposit or automatic transfer to put money into a savings account, so you do not have to think about it.
  • Use any extra money from holiday bonuses, tax refunds, and other sources to enhance your savings account.
  • Cut expenses wherever you can, and make a budget for “fun money” to keep yourself on track.
  • Consider getting another job, especially if you are working part-time.

These same strategies for saving can also be used to pay off your student loan debt. If those payments are more financially pressing, and you want to get the debt off your credit report, focus on paying off the loans. If you can consolidate or refinance your student loan debt and spread out payments over 30 years, you may feel more financially secure to pursue other personal debts.

Step 4: Leave room to grow and change.

You may be ready and excited to work hard and pay off your student debt as soon as possible, but repayment may not be as easy as it seems.

Consider talking with a financial advisor to help manage your money. They can help you devise the best long-term approach.