As a recent graduate from college, you may be excited to embark on your career and gain new experiences. However, as you reach this new chapter in your life you will have to start thinking about paying off your student loans, if you have any, and make life decisions such as deciding how much to contribute towards your retirement. Some people might think that they first need to pay off their student loans before they can start saving for the future. In reality, it may be feasible to contribute to both with careful budgeting. Although student loans may seem like the immediate action, saving into your 401(k) can help you attain financial security in the future.   

There are different benefits to paying off your student loans instead of contributing to your 401(k) plan. The first thing you want to do is to make sure you are making your student loan payments even if it is just the minimum payment. Making on-time payments will help you establish a good credit history. If you are having trouble making your student loan payments or trying to figure out which payment is best for paying off your federal loans, the Consumer Financial Protection Bureau has various tools and resources to help you choose the best payment plan based on your income.

Here are some additional tips to consider when repaying your student loans:

• If you acquired multiple federal student loans, an option you can consider is the Federal Direct Consolidation Loan which can replace making multiple payments and lump your loans into a new one where you can do a single payment each month.
• For those with private student loans, you may be able to consolidate or refinance, your private student loans at a lower interest rate depending on your credit.
• Paying off your student loans will help reduce your debt and some student loans have no penalty if you decide to make a bigger payment than you have to. Paying off your student loans faster, if your budget allows for it, can actually save you money on interest in the long run.
• Depending on the type of loan you have and your income, the interest you pay on your student loans may be tax-deductible.

On the other hand, there are benefits of choosing to max out your contribution into your 401(k) plan, if your budget allows for it, instead of using it to pay off your student loans faster. Depending on your employer, employers often offer a 401(k) plan where the employer will match a dollar amount to every dollar you contribute up to a certain limit. If you decide to delay putting in a portion of your income to your 401(k) plan, you can miss out on the benefits of compounding interest and employer matching contributions. Think about it this way, that small payment now can add up to a much larger value once you decide to retire in the future. If you decide to pay off more of your student loans and opting out of your 401(k) plan, you may be throwing away the “free money” of your employer contribution.

There are also different factors to consider depending on your lifestyle and financial obligations. You want to make sure you weigh all your options and choose what you think is best for you. If you receive bonuses or promotions at work, consider placing those dollars towards your student loans and retirement rather than spending it on discretionary items. You may be surprised how that small payment now can make an impact on your financial future.

Written by Gabby Contreras, Financial Wellness for College Students Peer Educator, University of Illinois Extension, Spring 2019. Reviewed by Kathy Sweedler, University of Illinois Extension.