When money is tight, simply making the minimum payments on your loans can feel like a victory. But as your income goes up or you find other sources of cash, you might wonder about the best way to put that money to work. Should you pay off your student loans or save? These two financial goals—paying down debt and saving for the future—are both worthy ones. So how do you know which one to pursue? The right balance is different for everyone. To help you figure out what you should do, ask yourself these questions.

Do you have an emergency fund?

An emergency fund is exactly what it sounds like: Money to be used in the case of a financial emergency, such as losing your job, unexpected medical bills, or something else expensive that’s unforeseen and out of your control. Most experts advise working toward a balance equivalent to three to six months of expenses (or more, depending on the volatility of your industry or your personal situation), and stashing it in a separate but liquid account, so it’s easily accessible to get if you need it but not too easy to dip into for non-emergencies like a vacation. If you don’t have an emergency fund, or it’s not yet quite where you want it to be, you may want to direct any extra cash there before thinking about paying off loans.

Are you saving for retirement?

Everyone (really, everyone) needs to save for retirement, even as you’re paying down your student loans. And yes, you can begin saving for retirement while you’re still in college or in your first job. As you begin working, you may find that your employer offers a 401(k) match—taking advantage of this and contributing as much as you can up to the match can put you in good financial shape. Once your retirement plan is set, you can then determine how much extra you can put toward student loans.

What are your short- and medium-term financial goals?

Your savings priorities will depend on what you want to achieve with your money. Do you hope to buy a new car soon? Are you planning on getting married or starting a family in the next few years? Do you dream of homeownership? Think through your own financial goals, how long you’ll need to save for each, and how much money that savings will take out of your budget each month.

What types of loans do you have?

The urgency on paying back your student loans will vary based on the terms of those loans. Of course, you should always make at least the minimum payments. But if you’re deciding whether to pay more than that on your loans or save that money, check your student loan type (federal or private), your rate type (fixed or variable), and the interest rate you are paying. Then compare those to the rate of return you expect to get if you were to save or invest the extra cash. If your loan interest rates are low and fixed, you may want to prioritize saving over paying off your loans. On the other hand if your loans are high-interest, or you don’t have a plan to get a good return on your savings, paying off your loans may make more sense.

Another thing to consider is whether you’re working toward student loan forgiveness. If you work in certain jobs or fields, there may be the possibility of having your federal loans forgiven (i.e., wiped out) after a period of time making payments. If this is something you’re eligible for, and is a realistic option for you, paying off your loans early may not make sense for you.

Does your employer offer any student loan repayment benefits?

A small but growing number of companies offer student loan repayment assistance programs. If your employer matches your student loan payments, you may want to pay more than the minimum payment to take full advantage of the benefit. Similarly, if the company you work for has a 401(k) match, you should try to at least contribute up to the match for retirement. Otherwise, you’re leaving part of your compensation package on the table.

So, is it better to pay off student loans or save? It depends on your financial situation, and it doesn’t require an either/or approach—you could put some money toward each goal. If you are only able to (or only want to) focus on one at a time, it really comes down to your budget and your priorities. And while certain facts and numbers can make one option more appealing than another, there’s an emotional component to the decision, too. Some people feel weighed down by any debt, and may feel more comfortable jettisoning it as soon as possible by paying down student loans early. Others feel anxious unless they have a well-padded savings account, and those people may want to focus on savings. Consider the questions above, and then figure out what makes the most sense for your financial situation, goals, and lifestyle.


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