Ask Carrie: What's On First -- Paying Off Student Loans or Saving for Retirement?

Creators Syndicate | 6/18/2014, 10:58 a.m.
Dear Carrie: I'm 24 and came out of school with $80,000 in college loans. I've been luckier than most of ...
Carrie Schwab-Pomerantz

BY CARRIE SCHWAB-POMERANTZ

Dear Carrie: I'm 24 and came out of school with $80,000 in college loans. I've been luckier than most of my friends and have a full-time job, but I'm wondering whether I should pay off my loans before I start saving for retirement. What do you think? -- A Reader

Dear Reader: This is a great question and absolutely timely. With total student loan debt now topping 1 trillion dollars, there's a lot of concern about how this debt is preventing young people from buying a home, saving for retirement or starting their own families. Paying off student loans is, in effect, keeping young adults from investing in their futures. It's bad for them -- and bad for the economy as a whole.

But it doesn't have to be this way. It all depends on how you prioritize. You -- and every graduate who's struggling with debt -- can make choices on how to pay down your loans that will help balance past obligations and future goals.

Obviously, you have to pay at least the minimum on your student loans and never miss a payment. But beyond that, you can create a system to stay on top of your loans while at the same time contributing to your financial future.

UNDERSTAND THE DIFFERENCE BETWEEN "GOOD" DEBT AND "BAD" DEBT

The first thing is to realize that not all debt is equal. Some of it can actually work for you. For instance, debt that's lower-cost and potentially tax-deductible, such as a mortgage or a student loan, falls into the "good" debt category.

On the other hand, high-cost debt such as credit cards and car loans is definitely in the "bad" debt category. It's the most costly, especially over time. Plus, you're borrowing to own something that depreciates. Think about what happens the minute you drive a new car off the lot.

Good debt can actually be a financial tool. Bad debt can be a financial nightmare. So your goal should be to shed the bad debt as soon as possible, while systematically paying down the debt that's working for you.

STRIKE A BALANCE BETWEEN DEBT PAYMENT AND SAVING

From my point of view, your top saving priority should be retirement. So once you've accounted for the minimum payments on your student loans, here's how I suggest you prioritize your savings and payments:

--Contribute enough to your company retirement plan to take full advantage of your employer match. This puts extra money in your pocket.

--If you have a credit card balance or a car loan, focus on paying those down next,

starting with the highest interest.

--Build an emergency fund to cover at least 3-6 month's essential expenses.

--Save more for retirement. The good news is that because you're starting in your

20s, you should be in good shape for retirement if you can save 10 percent of your gross

salary throughout your working years. (Those who postpone starting to save for

retirement have to increase this percentage.)