Pay Down Student Loans or Save for Retirement?

I doubt very many of my teacher friends would be interested in this post, but my nerdy friends from back home and I talk about this stuff quite a bit. This is what happens when you love people who are engineers, accountants, architects, and otherwise math inclined people.

My friends and I have debated back and forth on the student loans vs. retirement issue for a while. Everyone is different, with different priorities, and has different levels of risk aversion, but I wanted to figure out what I should do based on my situation. I think this post might also be useful for other international teachers like myself who have considerable student loan debt and who can’t rely on social security or a cushy teacher retirement plan.

You have been warned…there are many numbers ahead!

I decided to aggressively pay down my student loans first while currently investing 9% of my salary into retirement.

I asked myself a few questioned and used a few of the free calculators found online to answer them as best I could.

  1. How much would my lowest payment be (without doing an IBR) for my student loans so that I can pay more into retirement? $392 according to the repayment estimator.
  2. How long would it take me to pay off my student loans at that rate? 25 years
  3. How much interest would I have to pay on my student loans if I paid the minimum? $ 117,529 I just vomited in my mouth!
  4. What if I really did pay the $0 based on the income based repayment plan? I would pay $0 as long as I was living overseas making less than $80K, have this excruciating number hanging over my head until I was 54 years old, and then at age 54 I would have to pay income taxes on the $152,274 in loan forgiveness. I don’t know how that tax part works, but that sounds scary considering that that number is more than 3 times my yearly salary!!
  5. How much interest would I pay on my student loans if I paid $1000 a month plus two extra $1000 payments at the two bonus pay months? $8691 according to a debt reduction calculator
  6. Would I rather take a lower paying job with a better location and better social life that wouldn’t allow me to make this standard payment (hey Barcelona!)? Yes
  7. Can I get any teacher loan forgiveness? It would be awesome since I am making about the same amount as teachers back home! Sadly, since I teach upper class students in a private school I don’t qualify for this.
  8. Am I missing out on a ton off compound interest in my retirement accounts? In one word…yes.

I’m sure I am missing things in my calculations because I am writing this after school, I’m tired, and I don’t do this kind of planning for a living, but I have done my best to answer my questions. As a teacher I have a final question for myself; what have I done to apply this information?

Right now, I have linked my tax returns to my student loan accounts and requested the income based repayment plan based on that info. The student loan powers that be then set my monthly amount to $0USD.

So, I could TECHNICALLY pay $0, but then I would be accruing tons of interest. Instead, I choose to pay off my student loans based on the highest interest first (8.5, 6.8, and 1.7% respectively). I pay $1000 per month on my student loans and make an extra $1k payment in December and June when I get a bonus from my work.

The thing that worries me the most is the compound interest I’m missing out on in my retirement planning. I read this article in the NYT and it just fed into my worry. This worry is actually what spawned this entire post.

What kind of compound interest could I earn on my retirement account if I invested an extra $600 (based on the lowest payment) or $1000 (based on IBR) per month?

$984,085.17 at $600 per month, $1,590,172.14 at $1000 per month, and $1,226,009.37 if I continue paying what I am now for the next 5 years and then bump it up to $1000 per month for the rest of the time according to a compound interest calculator.

Personally, I can’t imagine ever having more than a million dollars in a retirement account, so any amount over $1mil seems outstanding. I am a little pissed that I am missing out on $364,163 by paying off my student loans aggressively. However, the peace of mind I will get after kicking my student loans out of my life will do something to make up for it.

While I am going to continue my aggressive student loan repayment, by writing this post and doing all this research, I have convinced myself to throw any extra money (outside of my emergency fund and travel dreams) toward my retirement. Hopefully the extra deposits will shrink the amount of retirement money I’m missing out on!!

Other resources for a more general picture on this issue:

https://studentaid.ed.gov/repay-loans/understand/plans/ different repayment plans.

http://www.forbes.com/sites/learnvest/2013/12/11/saving-for-retirement-vs-paying-off-student-loans-how-to-do-both/

https://www.mint.com/blog/saving/pay-off-student-loans-or-invest-more-0714/

https://docs.google.com/spreadsheets/d/1k6Jx8LddXEvqxz2Eb93XAyY_eu_xqdmDHqPW6kZ1yLA/edit#gid=1520347266 spreadsheet I found with different student loan scenarios…that I didn’t use because I’m too tired after writing this

http://financialmentor.com/financial-advice/payoff-debt-or-build-wealth/5884

http://finance.youngmoney.com/credit_debt/paying_for_college/student_loans_retirement/

http://www.schwab.com/public/schwab/resource_center/expert_insight/ask_carrie/retirement/whats_on_first_paying_off.html

 

Please comment! What do you think? Am I on track? What am I missing? Share your thoughts!

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7 responses to “Pay Down Student Loans or Save for Retirement?

  1. I think I’m one of those “geeky friends” from back home since we’ve talked about this subject a lot!

    My priorities are essentially opposite of yours:

    1) Pay the minimum required by IBR on my student loans (about $290/month)
    2) Pay off any credit card balances
    3) Max contributions eligible for matching on my employee-sponsored retirement plan (3%)
    4) Max my Roth IRA for the year ($5,500)
    5) Additional brokerage contributions to ensure I’m meeting my retirement savings goal (about 12% of my pre-tax income)
    6) Other saving goals (travel, house down payment, etc.)
    7) Throw extra money toward my private student loans (which my husband would be responsible for should I die)
    8) Any extra student loan payments are applied toward lowest balance rather than highest interest (snowball method)

    I don’t plan on taking advantage of loan forgiveness because even at minimum payments, I’ll still have my loans payed off before the 25 year limit (for non-teachers). Also, I don’t feel bad paying way more in interest because I get most of it back via tax deduction.

    You should definitely have at LEAST a million dollars in your retirement account by the time you retire. I’m aiming for $1.6 million myself, but with my aggressive retirement savings plan, I’ll probably have a little over $3 million. That SEEMS like a lot, but if you have to live 13 years or more on $1 million, that’s only around $77,000/year. Again, that SEEMS like a lot, but if you factor in inflation you can think of it more like a third of that in today’s value (think $25,000/year). And you’ll still be paying taxes on at least earnings. If you retire somewhere cheap, that might be fine. But I want to stay in the US and that little income simply won’t do.

    By the way, the Forbes article you linked references a “50/20/30” rule… I’d never heard of it before, but I love it! Of course, I contribute way more than 20% of my take home to financial goals, but my living expenses are way less than 50% of my take home, so I guess it all works out?

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  2. Brie, you are one of my geeky friends that I love so much! I was just saying to my students that I am a huge geek because I LOVE to read and write. They laughed at me and said, “Then where are your glasses Ms. Isberg?!” I’ve failed as a geeky nerd. Sigh.

    Thanks for the thorough comment! I think you are set up quite nicely and your plan works for you. That is so cool that I will know someone who has $3 million dollars. hahaha!

    It makes sense for your lifestyle which is pretty steady, but I feel like my lifestyle has too many unknowns to have such a huge debt hanging over my head for years on end. What if I want to move to the Dominican Republic or Costa Rica and only make half as much money as I do now? Or land a dream job in Europe and not be able to save hardly anything?

    Right now I am spending about $600 per month toward my car loan (interest free from my school). When I pay the loan off in September I will be able to easily move that amount that I’m spending on the car to my retirement savings without feeling that I’ve made any changes. When I combine that with what I am currently saving I will be putting in 26% of my salary which is pretty good (this including my work based retirement program but not the school matching…’cause I don’t know how to calculate that).

    Also, when I eventually leave Venezuela I should be able to get back at least $6000 for my car ($1000 less than I bought it for) because nearly everyone gets what they put in or slightly more because cars are really hard to find in this country. If I put all of that toward my retirement I should be able to make up a little of what I’ve missed out on so far.

    At the moment staying here for four more years so I can aggressively pay off my loans and still save and travel sounds really enticing. I hope I can stick it out for that long!

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  3. I’m from England and I’m 24 (I finished my degree 3 years ago). I’ve spent my entire time since then in and out of Asia, teaching English or traveling.

    I haven’t even looked at my loans and I hate the fact that they will be sitting over my head for a long time.

    It’s a shame that loans are so much, and I guess I should start thinking about my future, for example retirement. I guess the US has it as bad as the UK, except I only paid £3500 a year as opposed to the current £9000+ a year tuition now. Ouch!

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  4. Just found your blog and enjoying your posts. I’m hoping for an international gig this next school year. Financial goal: pay off the loans. I was lucky enough to invest about 10yrs into a retirement before switching careers…so I have some catching up to do, but I’m willing to contribute less while getting rid of the loan burden.
    As long as you’re putting something away you’re making an investment and you can def catch up.

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    • Thanks for sharing Stacey.

      In some countries you can definitely save more- especially when your school pays for housing, utilities, and the cost of living is really low.

      Good luck on the job search!

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  5. Update! I landed a job in Shanghai and report July 30. My salary (non taxed) will be higher than my take home here and housing/utilities and transportation passes are included. Still can’t believe I’m really going as this was a huge “maybe” idea last year, but I’m proud of myself for hustling and getting a placement in an exciting city and at a school I believe will be a great fit.
    Fingers crossed that my savings goals can be accomplished and I can make a huge dent in my loans. This past year more than 50% of my payments went to interest and I did not see a significant savings or payback for claiming them, given the fact that my return was slightly higher than it was years previously when I had no loans. I’m still comfortable with taking a short hit in retirement while I pay off the loans.
    Love reading your blog and excited to read about your summer adventures!

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    • Congrats Stacey! That sounds like a really good deal that you got for yourself! If I went back to China I would love to work in Shanghai- I love that city.

      If you don’t travel for every single holiday outside of the country, you should be able to easily make some major payments. The only problem I had before is that I was paid in RMB and it was more of a hassle to change the money and then send it home. If you get paid in dollars it wont be an issue, but if you don’t then you really have to stay on top of things to make the payments.

      I’m like you and I would rather take a hit on retirement and pay off my student loans now. Good luck!

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