Should I make higher payments on my student debt, or invest and save more for retirement?
I am employed in the public sector and I earn about $45,000 annually. I have $120,000 in student debt. I am enrolled in the Public Service Loan Forgiveness (PSLF) program. My plan is to save and invest for retirement, while making the minimum payments on my student loan debt. Through the PSLF program, the balance on my loans will be forgiven in eight years (as long as I continue to work in the public sector). Do you recommend this strategy? Should I be paying more towards my debt? Or should I be contributing more towards my retirement plan?
As long as you are fairly certain you will remain in the public sector, and the PSLF program has informed you that your current employment qualifies, you should continue on with your current strategy. If you can have your $100,000+ loan forgiven in 8 years, that is like getting a $12,000+/year raise. However, if you don’t think it is likely you will remain in the public sector for 8+years, and/or, if you can find a job that pays you more than $60,000 - $65,000 per year in the private sector (that you like as much or more than your current job), then it might make more sense to take the higher paying job, and pay-off the debt with your new higher salary.
With the amount of debt you have in student loans it is imperitive that you finish the PSLF program. As long as you plan to complete the 8 years to have debt forgiven there is no reason to pay more towards you student loans.
As for saving for retirement- strive to save 10% of your income if possible. At the very least make sure to contribute enough to get any match that may be offered by your employer. This is like free money.
Even if you can't say 10% of your income right now- get started. You can increase the amount you put away over time. Also it is a good idea to try and set up an emergency fund with 3-6 months of expenses.
Congratulations on making it two years into the PSLF Program. I previously was a government employee and regretted I was unable to take advantage of it. It is a great program to help reward civil servants. I would suggest reaching out to the Dept. of Education to make sure your current job will qualify if you have not already done that recently. I would also suggest staying aware of any changes in government policy that could affect your eligibility. To answer your question, it would not be a bad idea to save for retirement instead of paying extra on your student loans with the plan that they will be forgiven under the PSLF. However, I would ask you to consider how long you plan to stay in the public sector. If it's possible that you might depart for a better job in the private sector it might be a good idea to hedge your bet so to speak. What I mean by that is to consider saving in a non-qualified or non-retirement account (or any account that you could access without penalty) the amount you would like to put towards either the debt or retirement. Once you make it to the full ten years and the debt is forgiven then you can systematically put the money into a retirement plan either with your employer or an IRA of some kind, provided you meet the requirements to participate in either at that time. This could allow a little bit of the best of both worlds. If you stay with the government and the debt is forgiven you now have funds you can add to your retirement. If you leave, you now have funds you can put towards the student loan debt. There can be lots of moving parts to maximizing your benefits under various repayment and/or forgiveness programs and I always encourage people to consider their total financial picture before making any decisions for the sake of one benefit or another to save the heartache of missed opportunities or life changes that upend your previous plans. There can be a variety of factors that affect the outcome of this suggestion or others given so always do your research or consult with a credentialed professional before acting. I hope you found this helpful.
Antowoine Winters, CFP®
Next Steps Financial Planning, LLC