Every year, hundreds of thousands of students take out student loans to fund their higher education. Due to the climbing rates of college tuition coupled with inflation, these students may very well be paying off these loans for twenty, thirty, forty years or more. Though the younger generation may not be thinking about it now, this can severely limit your ability to save for retirement or retire altogether.
Two groups of people seem to be hit the worst when it comes to managing student loan debt: recent college graduates and parents who cosigned their children’s student loans.
While graduation is exciting, it also can be stressful for recent grads. Now that it’s time to put your degree to good use in the workplace, you must decide whether to immediately attack those student loans or save for your long-term financial goals. Essentially, the decision comes down to spending your extra cash on paying down your student loans or saving for retirement. Though everyone’s circumstances are a bit different, here are some things to consider when deciding where to put your money.
Contributing as much money as possible early to your student loan debt can be very advantageous. By doing so, you will be able to avoid thousands of dollars in servicing fees and interest charges.
However, if you choose to put all your extra cash towards student loans and not into investing for retirement, you will miss out on the time value benefit of money. Due to inflation, $2 saved for retirement today will be close to $20 twenty to thirty years from now. By investing some money for your retirement now, you can accumulate ten-fold what you put in down the road. For this reason, recent grads should consider, at a minimum, matching their employers’ contributions to a 401k retirement plan.
Parent-cosigners of (recent) graduates also face the quandary of delaying retirement or entering retirement with the obligation to pay down their children’s loans in the event they are unable to do so or default. In many cases, parent-cosigners even choose to actively help their children pay their debt regardless of whether they can afford it so that the loans are paid off sooner.
In doing so, the majority of parents will be delaying their retirement for years, even decades past when they had planned to retire. For some parents, the piece of mind knowing their children will be debt-free and/or that the parent-cosigners will not enter retirement carrying their children’s student loan debt makes delaying retirement worth it.
Alternatively, parents who co-sign their children’s loans may choose to enter their own retirement with the cosigner obligation on their backs. Typically, this means parents will not have to delay their retirement. This also may seem like the fairest situation for many families; after all, it is the children’s debt, not the parents. But opting to enter retirement as a cosigner can have drawbacks, as well.
The obvious downside is that in the event your child defaults on the student loan, you will be liable for the payments. This may very well mean that you have to leave retirement and get a job (again) to be able to afford your lifestyle and your child’s debt. This can be challenging, particularly if you have been retired for a while or are older in age.
Though the majority of us do not choose to default on our obligations, there are a number of unforeseen life circumstances that may force your child into default, including illness, disability, and termination of employment. Unfortunately, lenders prefer to sue you, as the cosigner, in the event your child defaults because they presume you will have the money to pay the debt.
Consult An Attorney
There is not one, correct answer on what to do when faced with the choice of saving for retirement or paying student loans. Ideally, you should do both. But, we all know this is sometimes not possible given the costs of student loans in an unpredictable economy. However, there are options available to you.
If you have student loan debt and also want to save for retirement, or having trouble paying your student loans or any other type of debt, you need the help of an experienced debtor rights attorney—like those at Fitzgerald & Campbell—to review your case and discuss your options with you. Our attorneys have decades of experience representing clients in all types of debtor defense matters and we are here to help you!