Financial cage match: Paying off student loans versus investing for retirement


Recently, I made the bold claim that those who have debt aren’t ready to start saving for retirement. I added some relaxing caveats, but I really wanted to put them in an order. Debt first, investing later.

I don’t think this advice is particularly contentious when it comes to credit card debt. I’m pretty sure most people would come down on the side of getting rid of credit card debt first. (Right? Please say yes.)

However, when it comes to student loans, I get pushback. Sometimes, a fair amount of pushback.

So it bears taking a closer look at this particular situation. Let’s put both into a cage, and see which comes out victorious.

It’s time for a financial cage match.

In my left corner

Chances are, if you’re under 40, you have student loans. According to The Institute for College Access and Success, 7 in 10 seniors who graduated from public and nonprofit colleges in 2014 had student loan debt, with an average of $28,950 per borrower.

Most people have between 10 and 25 years to pay back loans. If we assume 20 years to pay back $30,000, we’re looking at about $200 a month.

That’s 20 years of paying $200 a month. Not being finished until you’re 40. It’s easy to feel a little despondent.

In the right corner

And while you’re looking at this picture, you may see retirement in the distance, and the vast, almost unreal sums needed in order to have any sort of comfortable retirement.

And those numbers are hard to look at. If you want to have a guaranteed income of $40,000 a year taken from an interest bearing account such as a Roth IRA, you’d need to have between $500,000 and $1,000,000 (depending on inflation and what returns you expect). When in your lifetime are you going to be able to accrue that much money?

This might encourage you to think “I have to start saving for retirement now because I need all the time I can get! I’ll give up on paying off my student loans.

This is an understandable emotional reaction. But I also want to give you some other information from a non-emotional place that may affect your decisions.

First round

Here’s a thought experiment:

Would you borrow money at 5% to invest in a product that earns 8-10%?

Maybe you would, since there would be a 3-5% spread. But how about this:

Would you borrow money at a fixed 5% rate to invest in a product that will earn 8-10% over the long term, but in the short term might return heavy losses?

I ask these questions, because not paying down your student loans in favor of investing for retirement is the exact same situation.

Something that isn’t a great deal now doesn’t automatically become a great deal over time. Yes, the longer you invest for, the longer your money grows. But remember that since you’re getting -5% in one place (here’s a reminder on negative money) and you’re also getting 8-10% in another place, you’re never going to be making more then 5%. No matter how long you wait, 10 minus 5 will never be more than 5.

If your student loans are higher than 5%, then it definitely doesn’t make sense to invest before paying your debt down. The difference is just too slight.

But what if your student loans are only 3%? Does that change things?

Second round

This is one of those situations where despondency can create your reality. If you really feel like you’ll “never” pay off your student loans, you’re going to be less likely to want to prioritize them. In effect, you accept the 5% (or whatever) rate you’re paying, and not push to change that.

But, if you believe that it’s possible to get rid of them, you may be more willing to work harder for it. That could mean, squeezing everything out of your budget (and getting a raise in the process), prioritizing it in your life, and getting on a plan. And you’d be amazed at how much more you are able to accomplish when you have a plan and are tracking your progress.

If you believe that you can pay off your loans, you’re going to want to do it as fast as possible, because you’re going to want to get to the fun part (investing) as fast as possible.

How do you get to the point where you believe it? Well, you could look at me, and think that if this guy can do it, anyone can.

Or, alternately, you could sit down, look at what you have, and start to prioritize taking ownership of your financial picture. I guarantee you that you will find that you have more than you think. Focus is kind of a magical thing that way, but it works.

If you’re still not convinced

I’ll concede a few points here, for those who the pull of investing is just too great to resist.

  • If you have a job where you get a “match” for putting money away, put away enough money to take advantage of the match. While we can quibble with 5% versus 10%, it’s hard to argue with 5% versus 100%.
  • If you have loans that are over $100,000, you can think of it like an “educational mortgage”, and prioritize it after putting away money for investing.
  • If you just want to start the process of investing, fine. As I’ve found, you can start with a minimum of $1,000. Have it at the ready for when you’re ready.

Final round

I want you to make the decisions on how to act that feel the most authentic for you. I’m not going to scold you for doing something different from what I suggest. I’d rather you have a reasoned argument that disagrees with me than blindly going along with what I say.

But I don’t want you to act based on the belief that the game is unwinnable. Yes, the game sucks. And it’s stacked against you. And that needs to change.

But you have agency in this fight. I challenge you to double down and see what you are capable of. The real winner in the cage match is going to be you.

Do you prioritize investing over student loans? I’d love to hear about your experiences.

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