Student Debt

Like many, Madison Zenzel pays her college loans monthly — and in doing so, has to forgo saving for her future.

“The amount that I would save in a ‘rainy day’ fund and then my IRA all has to go to paying my student loans, and I am left living paycheck to paycheck,” said Zenzel, a 21-year-old public relations coordinator in Los Angeles.

Zenzel is part of a growing percentage of people having their retirement impacted by the rising cost of college. New research by the Center for Retirement Research at Boston College shows student loan debt has been growing rapidly through the last decade. In fact, if working-age households had the same level of student debt as those now graduating, an additional 4.6% of households would be at risk of having inadequate income in retirement — with the percentage jumping from 51.6% to 56.2%.

Jamie McInnes, head of total retirement solutions for Prudential Retirement, said it’s not a choice — it’s a balance.

“Avoid the trap of choosing between paying off student loan debt and saving for retirement, as nobody can afford to wait to save for retirement,” McInnes said.

“Waiting comes with incredible risk and opportunity cost," McInnes said. "Individuals and their families miss out on the investment growth that the dollar would’ve experienced over time. Instead, strike a balance by saving and paying off debt simultaneously.”

McInnes said one way to strike a balance is to avoid waiting until after graduation to begin thinking about your repayment options, and instead start considering several factors before taking out a student loan — including earning potential, federal loan repayment and forgiveness programs.

Graduates about to take on trying to strike a balance between investing in retirement and repaying college loans also should sit down and write out a personal plan of how they will allocate funds in order to begin retiring student loan debt, while also saving for retirement, said Jeff Weeks, a financial advisor with Wells Fargo Advisors.

“By forgoing a company 401(k) plan, a person may be costing themselves more than they realize,” Weeks said. “Many companies match a portion of an employee’s 401(k) contribution, so by not contributing and therefore missing the match you could cost yourself quite a lot over time.”

Weeks also said by postponing saving for retirement young workers are missing one of the most valuable tenets of saving and investing — time.

“The power of compounding over time is astounding,” he said. “Plus a worker may be missing out on tax advantages, either by tax free growth through a Roth 401(k) or a tax deduction and tax deferred growth with a traditional 401(k).”

A growing number of households also are carrying student loan debt, because they took on their children’s debt — which is now eating into their own, more near-term retirement. This also can be a risky decision, said Kevin Phillips with Savant Capital Management.

“Students can take out loans to pay for their education, but retirees can’t take out loans to pay for their retirement,” Phillips said.

He said parents in this situation cannot base their decision on emotions and must remember the foundation for prudent financial planning should include estate and income tax planning, an integrated investment strategy, as well as college education planning.

“Incurring debt and/or paying for a child’s college education is a decision that should not be taken lightly and parents should carefully consider the long-term effect that this will have on their retirement goals,” Phillips said.

Nevertheless, Zenzel will continue to pay off her own loans, and she says even if her income went up, she’s not even sure she would save for retirement. She may instead pay more into her loans to avoid the interest charges.

“At this point I don't see how I will ever be able to save enough money to get by in my retirement,” she said.