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After Law School: Balancing Student Loans with Retirement Saving

Given the rising cost of education in the United States, new graduates face the challenge of balancing the competing interests of paying off student loans versus investing in other financial goals, such as retirement.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: January 14, 2015

Your first priority, before investing or prepaying your student loans, is to build a safety net fund for emergencies.

Next, deciding whether to prepay student loans or invest depends on how the interest rate on the loans compares to your expected returns over time.

When and how you pay off your loans are personal decisions determined by a number of factors, so real-life examples are often helpful for getting you started. We sat down with Nathan Howard, corporate counsel at student loan refinancing company CommonBond, to get his take on how he is handling the pay-or-invest balance in his life.

Background on Howard’s Graduate Student Debt

Law school graduate Nathan Howard
Recent law school graduate Nathan Howard

After Howard earned his undergraduate degree, he went straight to law school at Drexel University and graduated in 2012. By the end of his grace period, he owed nearly $70,000 for his juris doctor degree, with an interest rate of about 6.8%.

While that’s a hefty liability, Howard ended up better off than many of his law school peers; the average debt held by a recent law school graduate is about $140,000, according to the New America Foundation, a non-profit public policy group. He says a few things helped him out there:

  1. He attended a state school for undergrad, so he completed his undergraduate degree with almost zero debt.
  2. He selected a graduate school that offered an attractive financial aid package.
  3. He borrowed up to the Stafford Loan limit of $20,500 annually for grad students (that includes both subsidized and unsubsidized Stafford loans) for each year of law school, and he borrowed additional federal student loans.

If you’re still researching graduate schools and you’re somewhat flexible, consider that some schools might be willing to put together aggressive financial aid packages of scholarships and grants. “It helped that I was willing to go just about anywhere in the U.S.,” Howard said.

Pick a debt repayment plan and build a safety net fund.

After graduation, Howard’s high-level financial goals were to pay off his loans, save for retirement, live a modest lifestyle, and save for buying a home. He also needed to accommodate the high cost of living in a city while making his student loan payments of $788 per month.

While Howard was unable to set aside money for retirement in the first year out of school, he was able to make a budget and create a savings goal for a safety net fund of six months’ worth of living expenses.

“It was definitely tempting to start throwing money at the loans right away, but everything I read underlined the importance of a safety net fund,” he said. “And that proved out in that first year when, for example, I had to sink $1,000 into car repairs unexpectedly.”

Once that was taken care of, Howard had to tackle the student loans, which he started repaying in early 2013. First, he had to pick a repayment plan. He decided to go with the standard 10-year plan because he could afford the monthly payment, and there wasn’t anywhere else he was going to get a fixed 6%+ return on his money.

To save on his payments, Howard set up auto-pay and received a 0.25% discount on the interest rates, lowering his interest rate to 6.55%.

One piece of good news for graduates in this category: When taxes come due, you might be able to benefit from the Student Loan Interest Deduction. Your eligibility for this deduction is mainly determined by your Modified Adjusted Gross Income (MAGI); this deduction could earn you a few hundred dollars toward your loans or other goals. (Read the IRS guidelines here.)

Balance retirement investing and student loan prepayment.

With his safety net fund fully funded, Howard could now assess where to put his money to maximize his long-term portfolio.  

First, he started to prepay his student loans. While staying on the 10-year plan, Howard whittled down his balance by aggressively prepaying the loans, setting higher-than-minimum payments and devoting extra cash to loan payments.

With his risk profile, he found the fixed return on investment of 6.55% made sense as he saves for other goals.

Now, Howard is considering refinancing his debt, but he thinks the borrower protections and repayment flexibility of federal loans currently outweigh his refinancing options, which would mean consolidating the loans with a private lender.

To get his retirement savings started, Howard plans to max out the yearly $5,500 limit in a Roth IRA account this year, despite the fact that he has many other competing interests.

Roth IRAs come with both future tax benefits and the potential to serve as a housing down payment, or as funds for certain qualified expenses. While Howard would only use it as a last resort, he finds the flexibility comforting.

Plan for future saving.

When deciding what to do with your money, you want to optimize both long and short-term goals. That means what you actually do will depend very much on who you are and what you want. Howard said that this order of priority has been very helpful in evaluating his goals for the future:

  1. Contribute to his 401(k) plan up to the employer match.
  2. Pay down debt (high-interest debt first).
  3. Max out an IRA.
  4. Max out 401(k) beyond the employer match.
  5. Open taxable investment accounts.

To learn more about how aggressively Howard plans to repay his student loans, visit

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