Help You Pay off Your Student Loans

If you’re dealing with student loans, it might be hard to even consider the idea of saving for retirement. When you’re paying hundreds, or even thousands, of dollars every month towards your debt, how can you possibly find extra room in your budget to invest?

It’s an understandable feeling, but there’s a hidden relationship between these two financial goals that can make it easier to accomplish both at the same time.

In fact, saving for retirement can actually reduce your student loan payments and help you pay them off even faster. Here’s how it works.

 

How Retirement Contributions Affect Student Loan Payments

If you’re enrolled in income-driven repayment, your monthly student loan payment depends on your income. The less you make, the less you have to pay.

The actual number used in the calculation is called your Adjusted Gross Income, or AGI. This number is calculated by adding up all the money you make during the year and subtracting out certain allowed deductions.

As it turns out, retirement contributions are among those allowed deductions. Every dollar you contribute to your 401(k) or Traditional IRA is subtracted from your gross income when calculating your AGI.

What that means is that by contributing to these retirement accounts, you reduce your income for the purposes of calculating your monthly student loan payment. And a lower income leads to a lower monthly payment.

A lower monthly payment isn’t always good. Paying less now often leads to paying more interest over time. But there are two big potential benefits:

  1. Increased flexibility. You can always choose to pay more each month, but smaller required payments give you more flexibility to adjust to whatever life throws your way.

  2. Increased forgiveness. Less money paid towards your student loans could result in more of your loans being forgiven, especially if you qualify for Public Service Loan Forgiveness. Though it’s worth noting that some people have recently had serious challenges with this program.