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Personal & Financial

How to Pay Off Your Student Loans While Also Saving for Retirement

Cathy Pareto


  • The burden of student loan debt may leave you feeling like you should just focus on repaying the loan amount as fast as possible and at all costs. However, you may end up hurting your long-term financial goals, including your retirement.
How to Pay Off Your Student Loans While Also Saving for Retirement
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One of the most expensive degrees you can earn is a law degree. According to a recent issue of US News & World Report, many law students finish their education with student loan debt amounts ranging from $38,000 to more than $180,000. For many recent graduates, the burden of this debt may leave them feeling like they should just focus on repaying the loan amount as fast as possible and at all costs. After all, no one likes the feeling of having debt. While this may seem like a good strategy, you may end up hurting your long-term financial goals, including your retirement. So how do you tackle both paying off your debt and saving for retirement? By making the right choices early on in your career and by having a clear financial plan.

Make the Right Career and Lifestyle Choices Early

It should come as no surprise that the higher the amount of debt you have, the more money you will need to make to repay it. This means that you will have to make some very important decisions early on in your career to help you maximize your earnings, reduce your debt, and begin saving for tomorrow.

Relocate. This is the time in your life when you will have the most flexibility when it comes to where you live. Take advantage of it by finding a job in a state or city where salaries are higher. Of course, you also will have to factor in the cost of living before deciding if the move is right for you along with other practical considerations. If you are not licensed to practice in the state that you are considering moving to, you will need to negotiate items such as having the firm or employer pay for and allow you to take some time to complete a bar review preparation course and to sit for the bar exam. You should also find out if your prospective employer will pay for you to keep your current legal licenses and accompanying CLE courses.

Negotiate Job Offers and Raises. Do your research on salary trends for the position and location you want, and always try to negotiate the original offer. When it comes to raises, always be willing to take on extra work and make it known that you want to get to the next level. Keep a record of all your contributions that go above and beyond your responsibilities so you can negotiate a raise.

Work for a Larger Law Firm. Larger law firms tend to offer higher salaries and better benefits, and some may even offer new recruits help with some student debt repayment. Working for a larger firm will not only help you start to build a great network of colleagues and experience, but the right firm on your resume today could also help you land your next dream job tomorrow, perhaps at a smaller firm. If you are not able to land a job at a larger firm, do not despair. Think strategically. Visualize the position you want to have in the future and accept a position at a firm that will provide you with the experience you need to get it.

Live Below Your Means. Making a decent salary doesn’t mean you should blow it on rent in the trendiest, coolest apartment building. It also doesn’t mean you should rack up credit card debt to live a lifestyle you can’t afford. Remember, you have your whole life ahead of you along with a very long earning potential. If you buckle down today, you will thank yourself tomorrow.

Have a Career Plan. Your career is your business and as such you need to have a business plan to succeed. Create a plan for yourself that includes not just goals but steps to get there. If your goal is to make partner within a certain number of years, then you need to be laser-focused on the steps you need to take to get there. Start by knowing the promotion process at your firm and setting achievable milestones.

Long-Term Financial Planning

It is not good enough to know where you want to be in the future, you must plan to get there. Think of yourself as a business that needs a business plan. Your financial plan can be divided into two equal parts—reducing your debt and increasing your net worth.

Reduce Your Debts

Create a Budget. As a financial planner, I see a countless number of individuals who make high six-figure salaries, yet they still have a hard time saving. To make it worse, some don’t know where their money is going. For your financial health, it’s not how much you make, but rather how much you spend. Before you get started on reducing your debts, you need to get a good handle on your expenses. This requires that you organize your spending. You can use online applications such as Mint or invest in a more comprehensive tool like Quicken to help you do this. These tools allow you to download data directly from your bank and categorize it into meaningful blocks and then create reports to show you where your money is going. Once you have categorized your spending, you can create a budget and look for areas that may need improvement. Surely, you will be able to save a little money somewhere.

Student Loan Repayment. When paying down your student loans, start by getting organized. Put together all your student loan information in one place, including the amount you owe, the interest rate, the payment amount, and the terms.

You should explore refinancing your loans if they have high-interest rates (rates ranging from 6 to 9 percent). Bear in mind that certain factors, such as your credit score, may impact your ability to refinance your loans. If your interest rate is low, consider consolidating your loans so you only have one payment to make. This may save you money that you can use to put away into retirement and into paying down your loan.

If refinancing is not an option, then consider making extra payments to the loan with the highest interest rate. This will accelerate the time it takes to pay it off and will save you some money on the interest that you owe. Once you are done paying down one loan, use half the money you had been paying for the first loan and send it to the second highest interest rate loan and the other half into a retirement account.

And while it can be tempting to bump up your lifestyle when you get a raise or a bonus, try to resist the urge. Remember your long-term goals. There will be cool vacations and nice apartments or homes in your future. Split your raise or bonus amount into your two buckets: debts and retirement.

Reduce Credit Card Debt. Credit card debt is one of the most expensive types of debt you can have if you are not able to pay off the balance each month. The reason for this is that credit cards charge interest on top of interest also known as compound interest. For example, if your revolving balance is $10,000 and your APR is 17 percent, this means you will have a daily interest rate of 0.0466 percent. 

To make matters worse, making minimum credit card payments will probably mean that you will only be making interest payments so it will take you a long time to pay off the principal amount.

If you have multiple credit cards with revolving balances, make a plan to pay off the highest interest rate credit card first, and then use the money you had been sending to that first card to pay off the second-highest interest rate credit card, and so on. This is sometimes called the “roll down” method.

Increasing Your Net Worth

Protect Your Credit. Nothing will make life more difficult than having bad credit. Not only will this impact your ability to borrow money in the future at a reasonable rate, but it also can limit your job opportunities as any preemployment background checks include checking your credit report. So, protect your credit report and score and make sure you monitor it on a regular basis to ensure that there are no mistakes. If your credit score is not so great, work on it by making payments on time, limiting new credit inquiries, and reducing your debt amount.

Take the Free Money. I often am surprised by how many people end up leaving free money on the table when they choose not to join their employer’s 401(k) plan. Most large organizations offer what is known as an employer match, which basically means that your employer will match your 401(k) contribution dollar for dollar up to a certain amount. At a minimum, you should try to contribute up to the match. If you can afford more, you should save more into your 401(k) plan if it offers reasonable investment choices.

The Power of Compounding. The reason I don’t advocate for people to focus solely on paying down their student loans is because of the powerful impact of compound interest. To quote Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.”

The earlier you start saving for retirement, the more time your money has to grow with compound interest and help you achieve your goals. Don’t give up this time. No one ever regrets starting to save for retirement early.

As I tell my clients, the key to financial success is having a plan. If you put in the effort to get organized and live within a budget at the beginning of your career, you will be in a much better financial situation later. Having a better financial position means that you will have more choices when it comes to where you want to live and where you want to work.