The student loan debt bubble recently approached the $1.5 trillion mark, with few signs of slowing down. This problem isn’t isolated to recent college grads and 30-somethings, either. Parents and grandparents are on the hook for millions of loans both as current and former students themselves or co-signers of loans. Even more alarming is the fact that 40% of the 65+ year-old borrowers or co-signers are in default on their loans.
The personal and societal consequences student loan debt, combined with the problem of people not saving enough for retirement, inevitably lead to a pretty gloomy outlook for the future of our economy. But it’s not enough to simply talk about these major problems, we need to talk about what can actually be done to minimize the negative impacts on individuals, their families, and society overall.
First and foremost, figure out your priorities and rank major financial decisions and goals in order of most important to least important. There are few ways out of student loans once you have them, so your primary consideration should be whether you set aside more money for a down payment on a home or more money towards retirement.
Here are a few things to keep in mind as you assess your current financial situation.
Should You Save For a House or Save For Retirement
Do You Really Need Your Own Home?
By a wide margin, Millennials are not buying homes as much as Gen Xers and Baby Boomers did. The so-called “crisis” of 20- and 30-somethings not buying their own homes is likely caused by student loan debt, a greater generational desire to remain relatively mobile, and skyrocketing home values, just to name a few. But let’s not focus on the problems and causes, let’s focus on potential solutions?
On one hand, it’s perfectly possible to save for a mortgage down payment while you still have student loans. As long as you’re consistently paying more than the minimum payment on your loans each month, then setting aside some money for a down payment instead, could be a reasonable solution.
On the other hand, do you really need your own home? After all, it’s generally true that your primary residence isn’t considered an asset because you’re constantly paying for the mortgage, property taxes, private mortgage insurance, upkeep, and maintenance.
Retirement Planning: The Earlier, the Better
There are far too many people who reach retirement age with no savings. When this happens, people have no choice but to continue working in spite of increasing health issues and missing out on the rest and relaxation they could’ve enjoyed if they had started saving when they were younger.
When you have student loan payments demanding your attention each month, thinking about long-term goals like retirement savings may seem like less of a priority. However, the consequences of waiting to start investing in an IRA or 401(k) might be more financially detrimental than the amount of interest you’re paying on your student loans.
This is why saving for retirement right now is so important. If you promise yourself that you’ll start saving for retirement once you’ve paid off your student loans and put a down payment on a house, other life expenses will likely come up along the way and you’ll never actually save for retirement.
While everyone’s situations are different, a general rule would be that you should prioritize retirement savings over saving for a down payment on a home of your own.
Balancing Your Personal Budget
Ultimately, the question of how much of your discretionary income you should allocate to student loan repayments, mortgage savings, and a retirement account comes down to your own personal financial goals.
If you could find ways to monetize your home in ways that wouldn’t be possible for renters, then perhaps saving for a home while paying off student loans and saving for retirement could be a good option.
Having the freedom to design, decorate, and landscape your own home in any way you’d like sounds like a great goal, but it shouldn’t come at the cost of your retirement savings. To avoid running out of money during retirement, strive to invest more in your retirement account than you put towards a mortgage downpayment. It will take longer to save for a home, but your retired self in the future will thank you.