This is one time when paying a loan off early may not actually pay: a new study has found that putting money into retirement savings instead of clearing student loans can result in higher net wealth.
Young workers are drowning, so to speak, in student loan debt, and it's no surprise that that's taking a toll on what they can do with the money they earn. Not just retirement savings, but other goals—like buying a house, getting married or having children—are being postponed as young grads try to get a handle on the debt left over from their college days.
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But a study from Morningstar-owned HelloWallet crunched the numbers to see whether young folks' struggle to pay off their student loans before tackling saving for retirement is actually a worthwhile undertaking.
More of today's grads owe more in college loans than ever before: In 1992, 10 percent of all U.S. households and nearly 30 percent of younger households (headed by someone under 30) had outstanding education loans, with the average amount coming in at around $9,400.
Today the situation is very different: among college graduates with bachelor's degrees, 60 percent have student loans.
And the amount these days is downright scary: now the average loan is nearly $27,300—and while in 2004 the total amount of outstanding student loans came to $350 billion, according to the Federal Reserve Bank of New York, in 2015 that number hit $1.2 trillion. That's more than the total Americans owe on credit cards or cars.
HelloWallet's data, as well as data from the Federal Reserve's Survey of Consumer Finances, indicate a disturbing trend: for every additional dollar of student loan debt, retirement savings decrease.
According to HelloWallet's data (from the HelloWallet user base, which "differs from the overall population in meaningful ways"), savings fall by 17 cents per additional dollar; according to the SCF, by 35 cents per additional dollar.
The study came to the following conclusion: "[T]here are very few circumstances in which paying off a student loan ahead of schedule with funds that would otherwise be saved in an employer-sponsored retirement account leads to a higher net wealth at retirement. And particularly, participation in an income-based repayment program can be beneficial."
So the message to those carrying student loan debt is to just keep making those easy monthly payments—and save for retirement.
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