Help! My Student Loans Are Due Again!

Dear Carrie,

I’m 24 and have $80,000 in student loans. I haven’t been making payments during forbearance, but know I’ll have to start up again soon. I have a good job but I also have $4,000 in credit card debt and my budget is tight. Should I be trying to save for retirement while I’m also paying off my debts?

—A Reader

Dear Reader,

Thank you for this great and timely question. With the student loan forbearance program about to end early next year, there are millions of borrowers like you who will need to restart their payments. This can certainly be stressful, especially when you’re trying to make ends meet!

The good news is that there are several steps you can take to make this more manageable, even on a limited budget. In fact, saving while paying down debt is pretty common, and waiting to pay off all your debts before investing for retirement or other goals could seriously work against you. So don’t think of saving and paying off debt as an “either/or” decision. The key is to set priorities and create a system that will allow you to get the most bang for your budget.

Reacquaint yourself with your student loans

Before you can prioritize, however, it’s important to refamiliarize yourself with exactly what you owe, and to whom. Go online to review your student loan balances, interest rates, terms, minimum monthly payments and repayment dates. It can be very helpful to consolidate all of this information into a spreadsheet for future reference, especially if you have several loans.

In general, student loan interest rates are likely to be lower than what you’re paying on your credit card debt. If you have federal loans, the rates are fixed and offer certain protections like forbearance, deferment, and forgiveness options. The Public Service Loan Forgiveness (PSLF) program is currently being revamped to make it easier for more borrowers to be approved. You also may be able to consolidate your loans to potentially lower interest rates and payments.

Also make sure that all your contact information is up to date and check to see if your loan provider is the same. Several companies dropped out of the federal student loan business in the last year, so it's possible you'll be working with a new provider.

Not all debt is equal

There is an important distinction between "good" and "bad" debt. High interest credit card debt is a prime example of “bad” debt. There is absolutely nothing good to be said about it. As Charlie Munger, Warren Buffet’s right-hand man, has said: “You can’t get ahead paying 18 percent.”

“Good” debt, on the other hand, generally includes mortgages or student loans—provided the interest rate is low and you don’t borrow more than you can reasonably handle. Additionally, in the case of a student loan, you're investing in your future and your ability to earn a higher income.  

Strike a balance between debt payment and saving

It can be challenging to save for your future at the same time that you're paying off your debts—but it is possible. Here’s how I suggest you prioritize while you’re doing both:

1. Make the minimum payments toward bills after covering essentials (food, utilities, shelter, etc.); this includes student loans.
2. Contribute enough to your company retirement plan to take full advantage of your employer match. This effectively puts more money in your pocket.
3. Build an emergency fund to cover at least three to six months of essential expenses.
4. Pay off your credit card balances. One approach is to start with the highest interest debt.  That makes mathematical sense, but if you want a psychological boost, you could also pay off your smallest debt first. In either case, your goal is to get to a zero balance—and keep it that way.
5. Save more for retirement. Because you’re starting in your twenties, you should be in good shape for retirement if you can save 10-15 percent of your salary throughout your working years (those who start later have to increase this percentage).

To me, these four points are important for everyone. Once you’ve got them under control, you can tackle other goals according to your personal needs and preferences.

1. Save for a child's education (notice that retirement comes first).
2. Save for a home. 
3. Pay down other debt, including your student loans.
4. Save even more. Once you’ve met your goals for emergency and retirement funds, consider investing for other short, intermediate and long term objectives in a taxable brokerage account.  

Understand the difference between saving and investing

As you look ahead, it’s also important to understand that saving and investing are two different things, and each is important. Saving is setting aside money and putting it in a safe place that you can access quickly—for example, in a savings account or money market account. You won’t get a big return, but when it comes to your emergency fund or any other money you'll need in the next two to three years, safety is paramount.

On the other hand, when you’re preparing for a goal that’s many years out (such as retirement), it is appropriate to invest some, if not most, of your money in the stock market so it has the potential to grow and outpace inflation. If you're new to investing, don’t hesitate to consult with a financial advisor who can help you build a diversified portfolio. 

Make it automatic

Finally, put as much as you can on auto-pay. This includes your predictable monthly bills, your student loan payments and your savings. If you make payments to a 401(k) plan, they automatically come out of your paycheck, but don’t stop there. You can set up automatic transfers from your checking to your other savings accounts as well. And once you have money to invest, you can even direct your savings automatically into a brokerage account.

I give you a lot of credit for taking your student loans seriously, and for thinking about retirement this early. Paying off debt can definitely feel burdensome and less interesting than investing. But you can do both with the right strategy. You’ll then be in great shape not only to reap the benefits of your education, but also to handle whatever the future holds.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (1222-2NLK)