Borrowers often believe they must choose between paying off loans and saving for retirement. After all, every dollar you put towards retirement is a dollar you can’t use to pay down student loans.

What if it was possible to build a retirement and make student loan debt disappear at the same time?

It might sound surprising, but there are at least four different strategies that can be used to work towards both milestones.

Use Student Loan Forgiveness to Build a Bigger Retirement

The federal student loan forgiveness programs can be excellent opportunities to eliminate student loan debt. For borrowers with large student loans and a smaller income, these programs can be life-changing.

Borrowers on income-driven repayment plans can have their remaining balances forgiven after 20 to 25 years worth of payments. Those employed by the government or an eligible non-profit can have their loans forgiven after just ten years of payments.

Unfortunately, there is some risk in chasing after student loan forgiveness. While borrowers should understand the rules of loan forgiveness, there are no guarantees. Even though the concern over the high rejection rates in the media may be exaggerated, there is no denying that forgiveness comes with a bit of uncertainty.

Borrowers worried about qualifying don’t have to skip the program entirely. Instead, they can chase after student loan forgiveness but protect themselves if it doesn’t happen.

One option is to open a savings account as a Plan B fund. Borrowers make the minimum student loan payments as they pursue forgiveness and any additional funds that they have available go into the Plan B account. Going this route allows borrowers to attack their debt aggressively, but also try to maximize forgiveness opportunities.

If it becomes clear that forgiveness won’t happen, the Plan B fund can be used to put a huge dent in the debt balance. If forgiveness does work out, the Plan B fund can be used as a huge head start toward retirement.

Refinance and Build a 401(k) or IRA

Those who aren’t eligible for forgiveness can still lower payments and save for retirement.

Companies like SoFi, Splash, and CollegeAve all refinance student loans for borrowers with a decent credit score and income. These companies pay off the older high-interest loans in full, and a new loan with a lower interest rate is created.

Further Reading: Learn how student loan refinance companies make money.

By refinancing, borrowers can free up some additional cash each month. This additional money can be put towards retirement in a 401(k) or an IRA.

For example, suppose a borrower pays $500 per month on their student loans. They may be able to refinance and get the monthly payment lowered to $350. This means an extra $150 monthly. Instead of keeping this money, they can invest it in an IRA.

Depending upon the terms of the student loans, a borrower can refinance student loans to get them paid off more quickly AND use the additional funds available each month to save for retirement. The key to the process is finding the lowest refinance rates available.

Get Your Employer Involved

One of the best ways to build a retirement is to take advantage of employer matching programs. If your employer offers a dollar-for-dollar match, it means each retirement contribution essentially doubles from day one.

Unfortunately, some student loan borrowers do not take advantage of this program because they feel they need every dollar from their paycheck to pay down student loans and pay for the essentials. (Editor’s Note: Passing on an employer matching program is usually a bad idea as it is essentially passing on free money.)

New legislation now allows employers to tie 401(k) matching contributions to employee student loan payments. In other words, payments toward student debt can become retirement contributions depending on your employer.

Because this is relatively new territory, many employers don’t know about this option, and many others will be hesitant to do so. However, some employers may embrace the opportunity. The matching cost to the employer is the same whether the match is based upon a student loan payment or a retirement contribution.

Discuss with your boss or HR how employers can now match contributions based on student loan payments. Many companies are looking for ways to attract young, talented people, and this could be very appealing.

Turn Retirement Tax Breaks into Lower Student Loan Payments

This is my favorite student loan hack.

Borrowers on IDR plans like IBR, PAYE, and SAVE can lower their AGI —and their payments — by contributing to a retirement account.

As most borrowers know, when IDR payments are calculated, the government usually uses your most recent tax return. The important number pulled from the tax return is the AGI or Adjusted Gross Income. A higher AGI means higher student loan payments, and a lower AGI likewise means lower monthly payments.

Contributions to a 401(k) or a traditional IRA lower the AGI. Accountants call tax breaks that lower the AGI above-the-line deductions. For each dollar that is put in a 401(k) or IRA, the AGI is reduced by one dollar.

If a student loan borrower puts $300 per month in an IRA, their AGI will be $3,600 lower the following tax year. The lower AGI means a lower tax bill AND lower student loan payments. Borrowers can use the federal government’s student loan repayment estimator to see how changes to their AGI would change their monthly student loan bill.

Putting money in a 401(k) or IRA provides student loan borrowers with three primary advantages:

1. A lower tax bill in April,
2. A lower monthly payment on an IDR plan, and
3. A larger balance in their retirement accounts.

It is worth noting that a lower monthly IDR payment can mean spending more in interest over the life of the loan, so borrowers should factor total loan cost into their planning. However, for borrowers who will eventually qualify for federal student loan forgiveness, this option can result in a larger portion of the loan balance being forgiven.

Final Thought: Plan Ahead and Know the Rules

These advanced strategies can be confusing, but they are worth understanding for better financial planning.

All student loan borrowers should familiarize themselves with the terms of their student loans and understand how the debt impacts their finances.

By understanding and planning, borrowers can use these strategies to quickly and efficiently eliminate their debt. They will also be empowered to meet other important financial goals, such as retirement.

The post 4 Ways to Save for Retirement AND Eliminate Student Loan Debt appeared first on The Student Loan Sherpa.

However, while paying off student loans early is a commendable goal, aggressive repayment can have drawbacks. Focusing solely on student debt may cause borrowers to overlook financial opportunities and make mistakes.

Today, we will explore how to avoid repayment mistakes and prepayment penalties. We’ll also discuss strategies for integrating early student loan repayment into your broader financial goals.

Should I Be Concerned About Prepayment Penalties with Student Debt?

Student loan borrowers who are ready for aggressive debt elimination needn’t worry about prepayment penalties.

The federal government does not impose any fees for early repayment of student loans. Furthermore, Congress has prohibited private student loan lenders from charging prepayment fees since 2008. According to 15 U.S.C. § 1650(e), private educational lenders may not impose “a fee or penalty on a borrower for early repayment or prepayment of any private education loan.”

In short, lenders cannot penalize borrowers who wish to tackle their student loans ahead of schedule.

Will Early Student Loan Repayment Affect My Credit Score?

Some borrowers worry that early student loan repayment may negatively impact their credit score.

There is some truth to this concern, as some borrowers have reported a drop in their credit score after paying off a student loan. The most likely explanation is that the borrower’s oldest line of credit, the student loan, no longer appears on their credit report. When the oldest line of credit disappears that average length of credit is shortened, and this can reduce a credit score.

However, even if there is a risk of a credit score drop, the impact is typically minor and temporary. If the score does decrease, it will likely be a small change, and the score should recover fairly quickly. Consider this: if a credit score is a measure of creditworthiness, shouldn’t paying off a loan improve the score?

Ultimately, spending extra money to artificially boost a credit score rarely makes sense. In most cases, a few points in either direction has no impact on the consumer, so spending extra money each month for a few extra points would be a huge waste of money.

In very rare instances, delaying a final payment can make sense. For example, borrowers who are looking to buy a house and worried that a small drop in credit score might be costly should contact their mortgage company or a mortgage broker. Depending on your financial situation, they may advise you that paying off the student loan first might be helpful. Other times, they might suggest waiting to pay off the loan until the mortgage is final.

Will I Miss Out on a Student Loan Tax Deduction?

Some borrowers choose to delay paying off their student loans because of the tax break they receive.

This strategy is generally not advisable, however. The deduction applies only to a portion of the student loan interest paid and provides a meager tax benefit.

Some borrowers may not even qualify for this tax break. Furthermore, those who do qualify will hardly benefit from delaying repayment. For every dollar spent on student loan interest, the maximum tax savings will be 22 cents. This small saving usually doesn’t justify the additional interest costs accrued by prolonging the loan repayment.

Opportunity Costs – The True Expense of Early Repayment

When planning their financial futures, student loan borrowers often face choices between paying off the student debt or working towards other goals.

When you make a student loan payment, that money is gone for good. For example, if you spend $500 on your student loans, you cannot use that $500 for anything else. Economists call this concept as opportunity cost.

To put it simply, if we focus solely on paying off student loans, we will postpone or neglect other financial goals. These deferred goals represent some of the most significant hidden costs of early student loan repayment. The following are some examples of the decisions student loan borrowers must face:

Saving for Retirement – For those with high-interest student loans, it usually makes sense to prioritize paying off the debt before focusing on retirement. However, borrowers with lower interest rates on their loans might benefit more from starting to save for retirement early.

A generous employer matching program should usually be a higher priority than student debt elimination. Similarly, many borrowers should choose to refinance their student loans at a lower interest rate to free up cash for retirement savings. This site has previously detailed the options and provided a suggested priority order for borrowers seeking to balance retirement goals and repayment goals.

Buying a House – The process of purchasing a home while managing student loan repayment can be quite complex. Qualifying for a mortgage often requires setting aside funds for a down payment. However, it can be frustrating to see money sitting in a savings account earning minimal interest while being charged a much higher interest rate on the student loans. Despite such frustrations, homeownership offers numerous personal and financial benefits that can make the irritations worth it.

With careful planning, many borrowers can qualify for a mortgage. Often, this strategy involves prioritizing the repayment of specific student loans before buying a house, while addressing others through aggressive repayment after the home purchase.

Loan Forgiveness – Another hidden cost of early student loan repayment that borrowers often overlook is the loss of potential student loan forgiveness. Many government programs require ten years or more to qualify. However, there are numerous forgiveness programs that borrowers should investigate before deciding to pay off their loans early.

The Significant Cost of a Small Emergency Fund

Having an emergency fund is crucial.

An emergency fund serves as a safety net, providing funds for unexpected expenses such as medical bills, car accidents, or urgent home repairs. Additionally, an emergency fund is essential in the event of job loss. Without any income, making sure that a roof stays over your head and food still arrives on the table can become challenging.

Given the high risks associated with not having an emergency fund, student loan borrowers should prioritize building up their cash reserves before focusing on early loan repayment. This site has previously taken a deeper look at how much should be in an emergency fund and how to balance the fund with student loan repayment.

Keeping Your Eyes on the Prize

The purpose of this article is not to discourage borrowers from repaying their student loans early. In fact, it is quite the opposite. Many borrowers benefit from eliminating their student debt early. The goal here is to dispel a few myths and help borrowers make well-informed financial decisions.

Paying off student loans guarantees a return on your investment. The savings on interest accumulate, and monthly payments can be eliminated. The financial and non-financial advantages of debt elimination can be significant.

Getting rid of student loans can be very satisfying, and the right strategy can make the debt disappear surprisingly quickly.

The post The Hidden Costs of Paying Off Student Loans Early appeared first on The Student Loan Sherpa.

The idea of using 401(k) or IRA savings to reduce immediate student debt burdens can be appealing, considering retirement seems distant while student loans demand immediate attention.

However, this strategy often leads to more financial woes than relief. While there are rare instances where such a move could be beneficial, most borrowers find an alternative approach to be preferable.

Can retirement funds from a 401(k) or IRA be used to pay off student loans?

If you have money in retirement accounts, no law prevents you from using your money to pay off your student loans.

However, just because you can make this move doesn’t mean you should.

There are three major issues with taking money out of a retirement account to knock out student debt:

• Income Taxes on Withdrawals: Withdrawing from a 401(k) or traditional IRA incurs income taxes, as these funds are tax-deferred.
• Early Withdrawal Penalties: If you’re under 59.5 years old, early withdrawals typically trigger a 10% penalty.
• Reduced Retirement Savings: Using these funds for student loans decreases your retirement savings, potentially leading to financial challenges later in life.

Early withdrawal penalty exceptions

There are several circumstances where an IRA or 401(k) early withdrawal penalty can be avoided. These exceptions include buying a first home, medical expenses, and Covid-19.

Educational expenses are also included, but this exemption doesn’t extend to student loan payments. Therefore, using retirement funds for a child or grandchild’s education is penalty-free, but the same rule doesn’t apply to paying off your own student loans.

It’s important to note that even in cases where penalty-free withdrawal is possible, it might not always be the wisest financial move if there are better alternatives.

Alternative Options

Rather than tapping into retirement funds, consider these alternatives:

Refinance Student Debt: If you have enough money in your retirement account to eliminate your student loans, the odds are pretty good that you could find a lower interest rate through student loan refinancing. One lender, Earnest, even considers retirement accounts when making lending decisions. Several lenders currently offer refinance rates around 5%. If the interest rates on your student debt are lower than what your retirement account is earning, you will come out way ahead.

401(k) Loans: A 401(k) loan, where you borrow from your fund and repay it, could be an option, avoiding taxes and penalties. However, failure to repay means taxes and a 10% penalty.

Reduce Retirement Contributions: Lower your contributions to your retirement fund to free up funds for paying off high-interest student loans, especially if you’re not benefiting from employer matching.

These strategies provide different approaches to managing student debt without compromising retirement savings.

When it makes sense to use retirement accounts for a student loan payoff

There are a few circumstances where dipping into retirement accounts is a reasonable choice.

• If you have already reached age 59.5 – If you are old enough to make a penalty-free withdrawal and you feel confident about your finances heading into retirement, pulling the money out to pay down student debt makes sense.
• If you have money in a Roth IRA – Roth IRAs are treated differently than traditional IRAs. Savers can withdraw Roth contributions at any time without penalty. Roth accounts only charge a penalty if earnings are withdrawn before age 59.5. Moving money out of a Roth account makes sense for borrowers who have high-interest student loans. If your student debt is charging 13%, but you only expect to earn 7-10% on your Roth account, moving the money is a logical choice.

The Big Concern with 401(k) and IRA Withdrawals

Raiding your retirement accounts may provide temporary relief from present difficulties but can lead to severe future challenges.

Consider this scenario: you decide to forgo student loan payments for the next three months. In the short term, it provides some relief. However, in the long run, your loan balance grows, accompanied by late fees, ultimately worsening your overall financial situation. Similarly, prematurely tapping into your retirement account is a short-sighted move.

Managing student loans can be demanding, but facing an underfunded retirement later in life presents even greater challenges. When you can no longer work and struggle to meet your financial obligations, the difficulties multiply.

The post Should I Empty My Retirement Accounts to Pay Off My Student Loans? appeared first on The Student Loan Sherpa.

For borrowers on income-driven repayment plans, monthly payments are calculated based on what a borrower can afford to pay. Putting money in certain retirement accounts essentially shields that income from being included in monthly payment calculations.

It might sound like a bit of accounting voodoo, but getting lower payments via retirement contributions is pretty simple.

Why Putting Money in a 401(k) or 457 Retirement Plan Means Lower Student Loan Payments

The whole “process” is basically three steps:

1. Put money in an eligible retirement account.
2. Claim a tax deduction for the retirement contribution.
3. Get a lower student loan payment on an IDR plan.

Step three is the one with the potential for confusion. To make sense of it, borrowers need to understand how monthly payments on Income-Driven Repayment (IDR) plans work.

The appeal of an IDR plan is that borrowers can make payments based on what they can afford to pay. The Department of Education calculates a borrower’s “discretionary income” in order to determine what they can afford to pay.

The starting point for the dictionary income calculation is usually the borrower’s Adjusted Gross Income (AGI) from their most recent tax return. The larger your AGI, the more you will be expected to pay on an IDR plan.

Shifting back to the retirement side of the equation, some retirement contributions qualify for a tax deduction. This tax deduction lowers the taxpayer’s AGI. The reduced AGI essentially shelters income from student loan payment calculations.

In other words, putting money in a retirement account lowers your income for tax purposes. This “lowered income” means lower payments on income-driven repayment plans.

If things are still a bit fuzzy, the next section will cover the eligible retirement accounts, and later on we will do a quick example with actual numbers.

The Exception: Roth 401(k)s and “Post-Tax” Accounts

Sadly, not all retirement account contributions mean lower student loan payments.

Some retirement accounts are considered “pre-tax” because the money placed in the retirement account isn’t taxed yet. These accounts are also commonly called tax-deferred, meaning you don’t pay taxes until the money comes out of the account.

These contributions that lower your tax bill are the ones that lower student loan payments. Common examples include most 401(k)s, 457 plans, and IRAs.

Borrowers don’t get a student loan benefit if the retirement account is a “post-tax” account. Post-tax contributions don’t lower your tax bill, which means they don’t help with student loan payments. Common examples of post-tax retirement accounts are Roth IRAs and Roth 401(k)s.

Sherpa Tip: If you get a tax deduction for putting money in your retirement account, it also means lower payments on income-driven repayment plans.

Other Ways to Save for Retirement and Lower Student Loan Payments

Clever borrowers might also wonder if other tax breaks mean lower student loan payments.

The answer is yes. Several other tax deductions also mean lower student loan payments.

However, not all tax deductions mean lower student loan payments. The critical detail on tax deductions is whether or not the deduction lowers your AGI. Tax pros call deductions that lower AGI “above-the-line” deductions. The tax breaks that don’t lower AGI are “below-the-line” deductions.

The following deductions are “above-the-line” and will lower income-driven student loan payments:

• Health Savings Account Contributions
• Alimony Payments
• One-half of Self-Employment Taxes
• Student Loan Interest

Deductions that do not lower student loan payments include the following:

• Charitable Contributions
• Mortgage Interest
• State and Local Taxes

Taking Advantage of Lower Payments for Tax Breaks

Before getting too excited about the opportunities for lower student loan payments, it is worth remembering that debt elimination is the goal of all borrowers. Lower monthly payments are nice, but they also mean spending more on interest in the long run.

The people chasing after student loan forgiveness will benefit the most from using retirement contributions to lower payments. If you are on your way to Public Service Loan Forgiveness, putting money in the correct retirement account means lower monthly payments, a reduced tax bill, more money saved for retirement, and more student debt forgiven.

Even if forgiveness isn’t on the horizon, the lower payment is still helpful. If you have a reduced federal student loan bill, it means you can focus your efforts on attacking your high-interest private loans or saving for a home down payment.

An Example with Actual Numbers

Suppose I make $60,000 per year working for the government.

I have a lot of federal student debt, so I enroll in an income-driven repayment plan. If I choose the SAVE plan, my monthly payments will be $226 per month, according to the SAVE Payment Calculator.

I realize that I need to be saving more for retirement, so I have my employer start withholding $200 per paycheck for my retirement. Taxes vary from state to state, but for this discussion, let’s assume my $200 contribution per paycheck lowers my take-home pay by $150. After a full year, I will have set aside $5,200 for my retirement.

That retirement contribution lowers my AGI by $5,200. According to the loan simulator, the lower AGI reduces my monthly payment to $183 per month. If I’m working for an employer eligible for PSLF, the lower payments would mean more debt forgiven after ten years.

In the months I receive two paychecks, I will have set aside $400 for retirement, spent $43 less on my student loans, and only lost out on approximately $300 worth of take-home pay.

To recap, by setting aside money for retirement, I’ve accomplished the following:

• Lowered my monthly student loan payment,
• Increased the money set aside for my future,
• Lowered my tax bill, and
• Increased the amount of debt that can be forgiven.

Long-Term Benefits: This approach has significant long-term benefits. The $200 set aside each paycheck can reasonably be expected to grow as time passes. Your original contributions may have grown considerably by the time you reach retirement age, depending upon your investment strategy. A hidden advantage to this approach is that borrowers get an early start on interest working for them instead of against them.

Clearly, some sacrifice is required to utilize the connection between retirement, payments, and forgiveness. However, for the borrowers who can forgo a bit of income today, the future benefits are pretty significant.

Why this is my Favorite Student Loan Hack?

For many student loan borrowers, retirement is a problem for the future. Student loans are the crisis of the present.

Taking advantage of this hack requires setting money aside for retirement. I love the idea of saving for the future and making the present a little bit easier.

The post How 401(k) and 457 Retirement Plan Contributions Lower Student Loan Payments appeared first on The Student Loan Sherpa.

However, it’s not all smooth sailing.

Retirees will need to engage in careful planning to minimize spending on student loans and maximize the potential for debt forgiveness.

Calculating Federal Student Loan Payments in Retirement

One of the reasons that federal student loans are preferable to private loans is the existence of Income-Driven Repayment (IDR) plans. The concept behind an IDR plan is straightforward: borrowers make payments based on their affordability, irrespective of their debt levels.

For retirees relying on Social Security, IDR plans often translate to monthly payments as low as $0. Those with a modest pension or living off savings may also qualify for very low or $0 monthly payments.

The crucial factor in determining IDR payments is the Adjusted Gross Income (AGI) from your most recent tax return. The lower your AGI, the more affordable your monthly student loan payment becomes.

To estimate your monthly payment using the latest and most cost-effective IDR plan, SAVE, you can use this calculator.

Automate $0 Payments: IDR plans are good for one year. After that year is up, borrowers must recertify their income.

New legislation now allows borrowers to authorize automatic recertification. For a borrower living on social security, this means they can qualify for $0 payments indefinitely if they select automatic recertification.

Keeping Student Loan Bills Low

The significant challenge for many retirees lies in keeping their Adjusted Gross Income (AGI) low, especially if 401(k) withdrawals play a crucial role in their retirement plan.

Withdrawing funds from a 401(k) or traditional IRA incurs taxation, leading to an increase in AGI and subsequently higher monthly payments.

Conversely, pulling money out of a Roth account, which has already been taxed, will not impact your AGI. Borrowers with both Roth and traditional IRAs may opt to rely on Roth withdrawals until their student debt is forgiven.

In certain scenarios, it might be advantageous to pack 401(k) withdrawals into a single tax year. Borrowers can use this approach to bury a single high AGI year from IDR calculations.

Sherpa Tip: Have a conversation with your financial planner regarding your student loans. Many financial planners may not be well-versed in the SAVE repayment plan and IDR calculations.

If you have significant federal student debt, this proactive planning is crucial.

Student Loan Forgiveness for Retired Borrowers

Another major perk of IDR plans is that the debt can usually be forgiven after 20 to 25 years of monthly payments.

There is no cap on the amount of debt eligible for forgiveness. However, it is possible that there may be a tax on this forgiveness. For now, this type of forgiveness isn’t taxed by the federal government, but it is scheduled to return in 2026. That said, there is hope that this tax eventually gets abolished.

Nonetheless, borrowers banking on IDR forgiveness should plan on a potential tax bill.

Estate Planning: Death and Disability Discharge

Another perk of federal student loans is that the debt does not survive your death. The federal government won’t come after your estate to collect student loan bills, and your kids will not inherit the debt.

When a student loan borrower dies, their federal loans are discharged. Likewise, if the borrower becomes disabled, the debt can also be discharged.

For this reason, borrowers shouldn’t feel obligated to pay off their debts for fear of leaving them behind for their children.

Student Loan Mistakes for Retirees to Avoid

Because student loan rules can be complicated, it is easy for some retirees to make a mistake.

Take care to avoid the following errors:

Don’t Make a Large Payment You Can’t Afford – Monitoring IDR payments and dealing with loan servicers can be a headache. However, with the available tools to keep repayment affordable, retirees shouldn’t feel obligated to pay off this debt quickly. This is especially true for those trying to get by on limited resources.

Watch 401(k) Withdrawals – If you are on an IDR plan, be careful about large 401(k) withdrawals. It could mean an entire year of higher student loan bills.

Don’t Miss IDR Certification Deadlines – If you choose not to automate certification, be certain not to miss a certification deadline. Borrowers who miss this critical deadline get placed on the standard repayment plan, which can mean massive monthly bills.

Don’t Be Afraid to Ask Questions – If your bill seems large or unaffordable, or if things appear confusing, don’t hesitate to ask for help. Servicers get paid to help borrowers navigate student debt. Feel free to leave a question in the comments if you get confused or frustrated.

The post Federal Student Loans in Retirement: Monthly Payment Calculations, Forgiveness, and Estate Planning appeared first on The Student Loan Sherpa.

Many federal borrowers depend upon income-driven repayment plans like IBR, PAYE, or SAVE to keep their monthly payments affordable. On IDR plans, payments are based on what borrowers can afford rather than what they owe.

The way the government calculates what a borrower can afford has some strange consequences for those saving for retirement.

Some retirement maneuvering can actually result in lower student loans and more student debt forgiveness. Other retirement planning strategies may cause larger student loan payments, even though the borrower moves money from one retirement account to another.

Today, I’ll break down how the government calculates monthly payments and how your retirement planning can influence monthly payments.

Defining Income for Income-Driven Repayment Plans

The critical number for borrowers to watch is their Adjusted Gross Income (AGI) from their most recent tax return. As AGI goes up or down, monthly student loan payments go up or down.

AGI is an all-important number because it is the starting point for discretionary income calculations. The Department of Education calculates discretionary income and then charges borrowers a percent of that number each month. The higher your AGI, the higher your discretionary income, and the higher your monthly payments.

As borrowers, we have a huge incentive to keep our AGI as low as possible during tax season. A lower AGI means a lower tax bill and lower student loan payments.

Retirement plan contributions, conversions, and withdrawals can have a huge impact on AGI.

Roth Conversions

In a Roth conversion, a taxpayer moves money from a retirement account like a 401(k) or traditional IRA and puts it in a Roth IRA. There are many circumstances where a Roth conversion is a sound retirement planning strategy.

However, the downside to a Roth conversion is that Uncle Sam charges taxes on the money that moves into the Roth account. The year you transfer money from a traditional IRA or 401(k) into a Roth account, it will raise your AGI.

In other words, a Roth conversion can mean larger student loan payments.

From the borrower’s perspective, this seems unfair. Moving money from one retirement account to another doesn’t mean you have extra money to pay toward your student loans. Unfortunately, the discretionary income calculation is a blunt instrument, and anything that raises your AGI raises your student loan payment.

Sherpa Tip: A Roth conversion isn’t always a bad idea if you have federal student loans. However, you should consider the increased monthly payment as one of the potential downsides of the conversion.

401(k) and IRA Rollovers

Moving money from a 401(k) into an IRA is a common retirement planning move. If you change employers, moving the money from an old 401(k) account is often a really smart move.

For student loan borrowers, a traditional IRA rollover is harmless.

When the money goes from the 401(k) of your old workplace into your traditional IRA, there are no tax consequences. No tax consequences mean no changes to your AGI and no impact on your monthly student loan payments.

What is the difference between an IRA Rollover and a Roth Conversion?

Traditional IRAs and 401(k) are tax-deferred accounts, meaning the money goes into the account without paying income tax. You don’t have to pay taxes until it comes out.

In a Roth account, you pay taxes on the money before it goes in, but withdrawals during retirement are tax-free.

Thus, if you move money from one tax-deferred account to another, there is no tax bill, but if you move from a tax-deferred account to a Roth account, you have to pay taxes on the money that moves.

401(k) and IRA Withdrawals

Pulling money out of a 401(k) or traditional IRA before retirement is expensive. In addition to the regular taxes that apply, a 10% early withdrawal penalty may also apply.

Because of the high cost associated with an early withdrawal, this move typically only happens when someone is facing a major financial emergency, makes a mistake, or qualifies for a penalty-free withdrawal.

Regardless of the circumstances that lead to the withdrawal, it is bad news for student loan borrowers. Money that comes out of a 401(k) or traditional IRA increases your AGI. Thus, whether you are retired or in a financial crisis, withdrawals can increase student loan payments.

Retirement Contributions

The flipside of this equation is retirement plan contributions.

If you put money in a tax-deferred account like a 401(k) or traditional IRA, it lowers your tax liability. These contributions lower your AGI and lower student loan payments for borrowers on IDR repayment plans.

Not everyone can afford to make retirement contributions, but if you can swing it, the advantages are huge. Setting aside money for retirement means:

• a lower tax bill
• lower IDR payments for a year
• more debt is forgiven if you reach forgiveness

This strategy is my favorite way to eliminate student debt and save for retirement.

Final Thoughts on Roth IRA Conversions, 401(k) Withdrawals, and IRA Conversions

Up to this point, we have only looked at the student loan consequences of these moves.

A Roth IRA conversion isn’t always a bad idea for student loan borrowers. Similarly, your finances may necessitate an early withdrawal from a 401(k).

The planning behind any retirement account maneuvering should go far beyond the student loan impact. However, the student loan consequences should undoubtedly factor into your decision.

The post How Roth IRA Conversions, 401(k) Withdrawals and Other Retirement Moves Affect Student Loan Payments appeared first on The Student Loan Sherpa.

Many students turn to student loans to pay for expenses like tuition and housing. When you are going into more debt each year, the idea of saving for retirement might sound strange. Surprisingly, putting money in a retirement account during college may be the best move financially. It also provides many intangible benefits.

While many different retirement plans are available, I’d argue that one plan stands out as the very best option for college students.

Student Debt vs. Saving for Retirement

Many people are legitimately concerned about their student loans. As such, many believe they should use whatever income they generate during school to reduce borrowing. It is a responsible plan, and the logic is sound.

However, it isn’t the only reasonable option.

On average, the stock market gains about 10% per year. While the stock market’s average annual gain is about 10%, this is not guaranteed. Returns vary, sometimes falling below 10% and other times rising above. That being said, if you can borrow money at 5% interest and invest it to generate 10% interest, you will come out ahead.

With a smart investment strategy, the investment growth could exceed the debt from student loans.

If you’re comfortable with risk, investing could be beneficial. For example, if you can accept that you might lose money, investing might be a good option. However, if you prefer certainty, focusing on student loan repayment may be better.

Additionally, some graduates will qualify for student loan forgiveness on their federal loans. If you have a slightly larger loan balance because you chose to put your summer earnings in a Roth IRA, it could mean more debt is eventually forgiven.

Looking past the basic accounting and risk considerations, there are additional benefits to putting money aside for retirement during school.

Benefits Beyond Dollars and Cents

Getting an early start on saving for retirement can be fun and educational. You can make some risky stock picks because the stakes are low. Losing money might still be a valuable lesson.

If you lose $500 betting on GameStop or the latest meme-stock, it sucks. However, if that lesson means you make smarter investments for the next 40 years, it is money well spent.

It is never too early to learn about saving for retirement. If you make mistakes in your early-to-mid-twenties and learn from them, you will be well ahead of the curve.

A basic understanding of investment strategies could lead to smart decisions when evaluating your retirement plan options at your first job out of school. Many people find saving for retirement, the stock market, and investing to be overwhelming. However, once you have a basic understanding of your options and strategy, it becomes more exciting. The sooner this transition takes place, the better off you will be in the long run.

Roth IRA Benefits for College Students

As college students navigate their financial journey, a Roth IRA emerges as an invaluable tool for securing their future. This retirement account offers unique advantages perfectly aligned with the financial circumstances and goals of students, making it a standout choice for early investment.

Two reasons, in particular, stand out:

Tax-Free Withdrawals in Retirement – Most retirement accounts offer a tax break for contributions. If you are in a high-income tax bracket, the traditional method is a huge perk. As a college student, you are likely in a lower income tax bracket. Instead of getting the tax break at the beginning, you get the tax break on withdrawals. Money in a Roth IRA grows tax-free, and eligible withdrawals are also tax-free. Roth contributions are an excellent way to take advantage of being in a lower income tax bracket.

Withdraw Contributions at Any Time – Most retirement accounts have complicated rules for withdrawal. Taking money out early normally means a tax bill and penalties. However, with a Roth IRA, savers can withdraw their contributions at any time. The only way they run into penalties or taxes is if they pull earnings early. For example, if you put $1,000 in a Roth IRA and it grows to $1,500, you can pull that $1,000 out any time you like. The $500 of growth must stay in the account until retirement, or an early withdrawal penalty may be imposed. This feature means a Roth IRA can serve as an emergency fund.

When is Saving for Retirement a Bad Idea?

While the Roth IRA offers great potential for college students, it’s not always the optimal choice. Carefully consider your financial situation, particularly if you’re dealing with:

• Credit Cards – With interest rates often exceeding 20%, prioritizing credit card debt repayment is crucial.
• High-Interest Private Student Loans – Similar to credit card debt, these loans should be addressed first due to their high interest rates.

Comparing the debt expenses and projected retirement earnings is helpful, but it isn’t the only step. Students need to carefully consider how they would react if they lost money on their investments. Investing isn’t for everyone, but a Roth IRA during college could be the perfect educational experience, and a head start towards retirement.

The post The Best Retirement Plan for College Students appeared first on The Student Loan Sherpa.

Each borrower has different financial circumstances, and some variables are impossible to know. Employment circumstances may change. The stock market may do really well, very poorly, or somewhere in between.

Fortunately, there are times when the decision is easy. Even when the decision isn’t obvious, most borrowers can find an efficient strategy by asking the right questions.

When You Should Definitely Put Money in a 401(k)

Some employers have excellent 401(k) plans. Specifically, they match employee contributions. These employers will even match, dollar for dollar, employee contributions. That means for each dollar you save, your employer will add a dollar to the account.

Less generous employer matching programs can still be a great deal for student loan borrowers.

Suppose your company will contribute 50 cents for every dollar you save. You are essentially getting a 50% return on your investment from day one. That is hard to beat.

When the Choice to Pay Down Your Student Loans is Obvious

Other people don’t have employers that match employee contributions. These people may have student loan interest rates well over 10%.

If you have an outrageous student loan interest rate, putting out that fire should be a priority.

It doesn’t make much sense to make an investment that you expect to earn 7% if your student loan charges 14%. Giving away a dime to make a nickel is a lousy strategy.

Adding Student Loan Forgiveness to the Equation

Many borrowers have federal student loans that may be eligible for some form of forgiveness.

For the borrowers chasing after forgiveness, putting money in the 401(k) becomes more appealing.

If the debt is on track to be forgiven, paying extra doesn’t make much sense. It just means less debt can be forgiven.

401(k) contributions provide additional benefits to the borrowers chasing forgiveness. By putting money in a 401(k), you lower your tax bill. The reduced tax bill means lower student loan payments. Lower student loan payments mean more money gets forgiven. Putting money in a retirement account to save money on student loans is one of my favorite student loan hacks.

Dealing with a Close Call

Unfortunately, the answer won’t always be obvious.

I like to think of student loan payments as an investment with a guaranteed return. If I pay an extra $100 on a student loan charging 7% interest, that $100 is earning a guaranteed return of 7%.

Many investments hope to earn 7% or better, but there isn’t an option out there that generates such a high guaranteed return.

Borrowers have to decide their willingness to accept risk. You have to weigh the fixed return on an extra student loan payment against the potential upside of investment growth.

A Note on Taxes: 401(k) contributions normally result in a lower tax bill. Additionally, student loan interest is a tax deduction. These tax factors may shift the scales enough to make putting money in a 401(k) the better decision. This is a good subject of discussion to have with your tax preparer at tax time.

Student Loan Refinance and Shifting the Numbers

One way to make a difficult decision easy is to refinance your student loans.

Suppose you decide 6.8% is the cutoff point for you. If your student loans are above that number, they get paid off first. Student loans below that interest rate take a backseat to 401(k) contributions.

Borrowers can refinance their student loans at a lower interest rate to free up money each month to save for retirement.

Presently, student loan interest rates in the 20-year, fixed-rate category are extremely low. Borrowers can lock in a low rate on their student loans and focus their efforts on building up their retirement savings. The catch is the borrowers need a decent credit score to qualify.

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

The post Should I Put Money in a 401(k) or Pay Down My Student Loans? appeared first on The Student Loan Sherpa.

Many student loan borrowers may lean towards eliminating debt first. Retirement is a battle for another day.

However, there are a couple of unique advantages to Roth IRAs that could make a Roth contribution a higher priority than debt elimination.

Comparing Interest Rates

One of the first considerations in the Roth IRA contribution vs. student loan payment question should be interest rates.

Borrowers with student loan interest rates in the 2-3% have more options to save for the future.

Historically, the average return for the stock market is around 10%. Some years the market will lose money and other years it will do far better than the 10% average gain.

A student loan borrower with a 2% interest rate on their loan can reasonably expect investments to earn more than the cost of the loan interest in most years. Thus, a borrower with an extremely low-interest student loan will usually be better off with a Roth contribution instead of paying down their student loans.

As student loan interest rates increase, the analysis shifts.

A borrower with a 7-8% interest rate loan might prefer to pay down their student loans first. Even though the market will historically return 10%, the risk might not outweigh the reward. Making payments on a loan charging 8% interest is like guaranteeing an 8% return on an investment. Many investors would gladly take a guaranteed 8% return over riskier market returns.

As investors get more experience, they will be in a better position to evaluate the potential Roth returns against the cost of letting a student loan linger.

The Big Roth IRA Advantage

There are many different types of retirement accounts. However, for student loan borrowers, a Roth IRA has an especially appealing feature.

Roth contributions can be withdrawn at any point without any taxes or penalties.

Roth IRA to Student Loan Example: Suppose I contribute $1,000 to my Roth IRA and let it sit for a couple of years. In that time, the balance grows to $1,200.

If my variable-rate student loan jumps up in interest, I might decide that I would rather use my Roth funds to pay down my student debt.

I can pull out the original $1,000 contribution and apply it to my student loan balance without facing any taxes or penalties. However, if I want to pull out the $200 worth of gains before I turn 59.5, I may have to pay taxes and a 10% early withdrawal penalty.

Ideally, I can withdraw just my contributions and leave the gains in my account to continue to grow until I reach retirement age.

The Roth perk here is flexibility.

If you put your money in a Roth account, you can always pull out the contribution and apply it to your student loans (assuming you haven’t lost money on your investments). Additionally, many people use a Roth IRA as an emergency fund. Going this route allows saving for retirement, but permits a penalty-free withdrawal in the event of a financial emergency.

If the money is used to pay down student loans, it is gone forever. Borrowers can’t get a refund on previous extra payments.

Risk Aversion and the Debate Between Student Loan Payments and Roth IRA Savings

Deciding between attacking student debt and putting money away for retirement isn’t a simple math equation.

A significant factor in the decision is risk aversion.

Some people are extremely cautious with their money while other people are literally gamblers.

Putting money in a Roth account has major advantages. However, there is a real possibility that Roth investments lose money. Savers can take steps to reduce risk in their investments, but any stock investment carries risk.

If the possibility of losses will keep you up at night, the guaranteed returns from student loan repayment might be the better option.

Dealing with High-Interest Student Loans

The final wild-card in the student loan payoff vs. Roth IRA debate is the option to refinance student debt.

Borrowers can use student loan refinancing to convert high-interest student debt into a lower-interest loan.

This route will only be an option for those who are employed and have a decent credit score. However, it is a great way to reduce interest spending and potentially free up cash for investment.

The best rates currently available are with the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

The post Paying Down Student Loans vs. Investing in a Roth IRA appeared first on The Student Loan Sherpa.

To the average student loan borrower, this concept may seem laughably absurd. If I’m still paying off my college debt, how am I ever going to retire? Retirement at any age may seem like a long shot.

Surprisingly, borrowers with student loans – especially federal loans – have a viable shot at early retirement.

The Case for Early Retirement

Saving for early retirement may be difficult, but the math is pretty simple.

The key to understanding early retirement planning is to look at the savings rate. If you can set aside a large portion of your paycheck towards retirement, you will be well on your way.

The people who spend 100% of what they earn will never be able to retire. The people who can save 100% of what they make are already financially independent.

It is the numbers in between that get interesting:

• A 5% savings rate means it will take 66 years to retire.
• A more aggressive 20% means it will take 37 years of saving to retire.
• Savers who set aside half of what they earn will be able to retire after just 17 years.

These calculations assume $0 in social security and a modest 5% return on investments after inflation.
(Source: Mr. Money Mustache article on the math behind Early Retirement.)

Saving 50% of income towards retirement sounds like a huge challenge, but the reward is retirement after just 17 years.

The Early Retirement Hurdle: Student Debt

Many student loan borrowers are currently paying a large portion of their income towards student debt. The need for things like food and housing make saving extra for retirement a major challenge.

The good news for federal loan borrowers is that monthly payments can be lowered to as little as 10% of their discretionary income.

Smaller payments won’t get the loans paid off any faster, but they will free up extra money each month to save for retirement. The smaller payments can also put borrowers on a path to student loan forgiveness.

Government and non-profit employees can get their loans forgiven in as little as ten years on Public Service Loan Forgiveness (PSLF). Under PSLF, when the debt is forgiven, there are no taxes.

Private sector employees will have to wait 20 to 25 years before their debt gets forgiven. The downside with this forgiveness approach is that the forgiven debt is currently taxed by the IRS, but there is growing support to change this policy.

Supercharging Federal Loan Repayment and Retirement Savings

Income-driven payments are calculated based upon a borrower’s Adjusted Gross Income on their most recent tax return.

Those with access to a 401(k) at work can increase their savings rate and get their student loan payments lowered by contributing extra to the 401(k). The reason this works is that 401(k) contributions are made on a pre-tax basis, and it lowers the taxpayers Adjusted Gross Income.

In short, by putting extra in a 401(k), a borrower:

1. Lowers their tax bill,
2. Sets aside extra money for retirement, and;
3. Lowers their student loan bill.

This triple benefit is an excellent way to handle student loan debt on the path to early retirement… especially for government and non-profit employees.

The same triple benefit also exists for traditional IRA contributions, Health Savings Accounts, and other pre-tax retirement vehicles such as a 457 plan.

Private Student Loans and Smaller Federal Loans

When it comes to smaller federal student loans, chasing forgiveness can often cost more than just paying off the loan in full. With private student loans, the only option is to pay the debt off in full.

The challenge with this debt is that it feels like a no-win scenario. Dedicate your efforts to paying off the debt, and retirement savings get neglected. On the other hand, focusing on retirement means the interest on the student loans will contently be working against you.

The appropriate strategy will depend upon your appetite for risk and the interest rate on your loans.

Generally speaking, low-interest student loans in the 3-4% range will usually be outperformed by investment accounts, so the borrowers with these loans will want to save as much as possible rather than aggressively paying down the debt.

On the other end of the spectrum, borrowers with double-digit interest rates will definitely want to pay down their student loans aggressively. Things are much trickier for borrowers with interest rates in the middle.

Suppose you have student loans with an average interest rate of 6%. By focusing on the loans rather than retirement, you essentially guarantee a 6% return on that money. Invest the money instead, and it could gain far more than 6%… it could also have a negative return.

Ultimately, the best approach will depend on luck. Some years the stock market can return more than 20% and crush the interest generated by the student debt. Other years, the stock market will lose money, and borrowers would have been much better off paying down their loans.

The only certain way to save money on student loan interest rates is to refinance with a private lender. Refinancing federal loans with a private lender means they will no longer be eligible for forgiveness, but it also means better interest rates. Lenders like Laurel Road and CollegeAve are both offering rates under 2.5% to borrowers with a good credit score and debt-to-income ratio. Over 20 nationwide lenders offer refinancing services, so many borrowers can find better rates.

Is Early Retirement Possible with Student Loan Debt?

Like any other financial obstacle, student loan debt will definitely make retiring early a challenge. However, borrowers who are crafty with their planning and aggressive with their savings may find a way to retire early.

The post Student Loans, Early Retirement and the FIRE Movement appeared first on The Student Loan Sherpa.