Student debt can follow clients from college graduation into their working years. Struggling to pay off educational loans while also planning for retirement is challenging. It can leave people wondering how to accomplish both and get ahead, particularly for those in entry positions who might not earn much money.
Practical Strategies to Balance Student Loan Debt and Retirement Savings
It takes 20 years for the average person to pay off student debt. Those with advanced professional degrees may take 45 years or more. Yet, those who save enjoy the power of compound interest to put away a nest egg for the golden years. Figuring out how to settle loans early while putting away as much as possible is crucial to a secure financial future. Here are some strategies you can use with your clients that are low-stress and achievable.
Explore Employer Assistance
Where a recent graduate works can make a significant difference in their financial future and free up money for retirement savings. Hopefully, you will begin working with people while they are fresh to the workforce and can guide them to look for positions offering employer student loan assistance.
According to the IRS, employers can offer up to $5,250 per employee annually tax-free. Anything over that amount triggers taxable earnings. Many companies now offer repayment programs or money toward relevant education as a perk to attract top employees.
Suggest Loan Consolidation
When starting college, people may have a one-time scholarship or savings. As time goes on and expenses increase, they begin to take out credit. The problem is that the borrower goes through multiple programs via federal and private channels and has several payments that soon balloon.
FAs can suggest consolidation to save on interest fees and reduce monthly payments. If the person has a decent credit score, they may be able to combine some — if not all — of their student loans to save money. The savings could be enough to throw a percentage of a paycheck into a retirement account.
Consider Income-Driven Repayment (IDR)
The government also offers an option for IDR to help those just entering the workforce and making lower wages. Rather than struggling to survive initially, you can delay payments until your wages increase.
To be eligible for IDR, your clients must have federal loans. If they work in public service, the client may qualify for forgiveness. The program changes periodically, so review studentaid.gov with your customers to see if they’re eligible.
Explore Tax Benefits
Talk to clients who are still completing an education about the many benefits of a Roth IRA, including using it to pay off student debt. Since contributions happen after paying taxes, clients can withdraw from the money for education without paying penalties. They will need to leave the interest untouched. Still, a client could put money into a Roth IRA, let it earn interest and then withdraw the original deposit amount to avoid taking out more loans for graduate school.
For those who already borrowed, a Roth IRA is still a smart place to invest at least a portion of their paycheck while they pay off their loans.
Apply Financial Modeling Tools
FAs who use financial modeling tools can try various scenarios and gain insight into which would work best for their clients. Focus on programs that offer prescriptive analytics, providing solutions that cater to each individual’s needs. Gathering reports on possibilities may allow you and your client to find creative solutions.
Create Strategic Plans
Finding practical ways to help clients balance paying student loans off while sticking with their long-term retirement goals requires optimizing debt reduction while maintaining a standard saving plan. At different times in their life, they may need to prioritize taking on or paying off one type of debt over another. Your job as their FA is to guide them in the right direction.
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