Should You Prioritize Saving Over Your Retirement and Student Loans?
In a situation where you have pretty high student loan balances and a long time till you retire, there can be a difficulty in determining what should take priority. According to Morning Star’s director of personal finance, Christine Benz, a lot of new graduates ought, in reality, to do a little of saving for retirement and paying off student loans.
Regularly making payment for your student loans will make it easier for you to move steadily toward the attainment of your financial freedom. You should, however, also be making contributions to your retirement plan so you can get an employer match if you are qualified to get one.
Once you have reached these preliminary hurdles, there are specific vital factors to consider when trying to determine where to put extra cash and get the most results in achieving financial freedom.
1. Examine your rates
If you are trying to decide where to put your money, consider the interest rate on your student loan against the expected return from your investments. According to Benz, there is a guarantee on debt paid down. If you make more payment on your debt, it would mean that it will be possible for you to retire the particular interest rate sooner. She added that if the interest rate on added student loan is at 5%, for instance, it might be a bit difficult to match the return after tax has been deducted through investments.
She noted that it might be impossible or difficult to get a 5% return on your balanced portfolio. If there is, however, a longer time frame until retirement, then it could be easier to earn interest rate through investment in a long-term bond or stock portfolio. Benz as a basic rule advised that the higher a rate is, then the higher the hurdle for investment portfolio will be.
2. Consider your taxes
Do not forget to consider the types of tax advantages you may be entitled to from making investments. As Benz noted, whether it is a company retirement plan or an IRA, you will be entitled to a tax break for money going in or our depending on your type of account. For instance, for traditional individual retirement accounts and traditional 401 (k) plans you pay pre-tax cash while IRAs and Roth 401 (k) plans you can pay in post-tax funds which you may then use for your tax-free income upon retirement.
You may also want to consider the likely tax deductions you may be entitled to for student loan debts. As noted by Benz, it may be possible to deduct as much as $2,500 of interest on student loans payment in a year. She, however, added that the individuals who are high-income earners may be ineligible.
3. Take advantage of refinancing opportunities
If you are yet to do so, student loans refinancing could be an excellent opportunity to reduce the rates you pay on your debts. According to Douglas A. Boneparth, a certified financial planner, several debtors at the moment pay within the range of 6% to 8% while some are also paying rates higher than that. He added that there were refinancing rates which could reduce the rates to as low as being within the range if 3.5% to 4%.
The president and founder of Bone Fide Wealth, expressly highlighted that people should take action and know that a plan is in place for everyone. For example, those with federal student loans need to understand that the extent of the flexibility they will no longer have if they are refinanced with a private lender. Their ability to be a part of forbearance options or income-driven repayment plans would also be affected. According to Boneparth, even though the financing by the federal government may not be the cheapest, it is often considered to be the most flexible.
Besides, Roger Ma of Lifelaidout noted that refinancing federal students loans with a private lender would also prevent one from being eligible to participate in Public Forgiveness Program. Ma added that some private lenders that offer competitive refinancing rates at the moment are CommonBond and SoFi. Ma also added that First Republic Bank offers reasonable rates to refinance students loan to personal loans, but there is a requirement that you must be resident in an area served by the bank, meet specific requirements such as credit scores as well as loan balance.
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