The big hurdle millennials must overcome to retire

People tend to focus on either debt repayment or savings, but you can tackle both.

Myelle Lansat


Myelle Lansat

Myelle Lansat

Personal Finance Editor

Myelle Lansat is a personal finance editor at Policygenius. She writes and edits the Easy Money Newsletter.

Published June 9, 2021|6 min read

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Debt can be a major financial burden if you’re trying to save for a financial goal like retirement. As recently as 2016, retirement seemed out of reach for many millennials. A study by the Center for Retirement Research found they lagged behind Gen Xers and Baby Boomers in retirement preparedness. More recent research shows they’ve caught up when it comes to getting good jobs and buying houses, but one thing is keeping them from saving for retirement as fast as previous generations: Student debt.

It takes roughly 21 years on average to pay off student loan debt and the average monthly payment is $393. That's one problem. On the other hand, experts recommend saving 15% of your salary for retirement. Plus you need savings for emergency funds or big purchases like a home. While younger millennials who have fewer financial obligations, it can be hard for older millennials to juggle multiple debt and savings obligations. 

The biggest mistake people make is focusing on either debt repayment or savings, instead of both, said Yanely Espinal, director of educational outreach at Next Gen Personal Finance: “You can do both with a hybrid approach.” 

You can achieve short-term or long-term financial goals while paying off student loans. Here’s how.

Create your own debt repayment plan

Student loan debt is a multi-year commitment, just like a savings goal. 

It’s important to understand how the debt you carry affects your financial picture for the short-term and long-term. For example, student and car loans are designed to be paid off over time. But letting credit card debt linger can affect your credit score and land you in collections.   

So what's the best way to pay off debt? Experts may suggest the avalanche method (prioritizing debt with the highest interest rate) or snowball method (paying off the smallest debt to the largest). Espinal recommends a combination of both. 

“Pay off smaller debts for small wins and align other debts in order of the highest interest rate. You’ll also want to take advantage of any [opportunities] that can help take care of the fastest growing accounts first,” said Espinal. 

If you’re unhappy with your current student loan interest rates, you may want to consider researching student loan consolidation or refinance services. Consolidating your debt means combining several federal loans into one new loan through the U.S. Department of Education (there are also options for private loans). That way you can chip away at one loan, balance and interest rate. Refinancing your loan is like a refresh of your existing loans (federal or private). You’ll take out a new loan with a new interest rate, repayment schedule and conditions. This process can help you get a lower interest rate and help you pay off your loans faster. Just be mindful that any federal loans you have will turn into private loans. That means you’ll lose the built-in benefits baked of federal student loans, like forgiveness or cancellation eligibility. 

Take advantage of government assistance programs

The Biden Administration did not include debt forgiveness in the annual budget, so you may be waiting a while before the government forgives all student loan debt. But there are other initiatives worth looking into. One of the more recent is the government’s COVID-19 Emergency Relief for financial aid, which effectively pauses student loan payments and implements a 0% interest rate until Sept. 30. The initiative gave millennials, like Niqua, a 27-year-old accounting professional, a chance to get ahead of their student loan repayment plan. 

Niqua has an undergraduate degree from the University of Central Florida and graduate degree from the University of West Florida. Niqua asked to keep her last name private so she could speak openly about her finances. As an out-of-state student, she had some scholarships heading into school but had to take out $21,854 in partial subsidized student loans. Niqua had a basic repayment plan with a six-month grace period and $140 minimum monthly payment through student loan provider Navient. Her latest repayment date was through January 2031.

At the start of 2020, Niqua started her own debt-free journey by prioritizing her student loan repayment plan while focusing on retirement contributions. She started contributing to her company’s 401(k) and used extra cash, like her tax return, for student loans. Then the pandemic happened.

“At first, I didn’t know what was going to happen. I decided to put extra money towards my emergency fund and initially pivoted from my plan to put extra money towards debt,” she said.  

She started making the minimum payments for the first few months of 2020. Then new student loan regulations changed the game.

“When the government said payments are halted and interest is 0%, I thought ‘this is my time,’” she said. 

The lure of no interest was enough to motivate Niqua to make lump-sum payments from her high-yield savings account.

“I went ahead and paid off two student loans in June 2020, another in October 2020 and another in January 2021," she said. "I’m now down to two student loans.” 

Commit to your savings goals

If you only focus on debt repayment, you won’t have any money to spend once you’re out of debt, said Espinal. Once you’ve prioritized your monthly debt contributions and compare that with your monthly bills, you can figure out how much to put toward other goals like retirement, investments and an emergency fund. 

A popular savings method is the 50/30/20 rule, where 50% of your income goes towards needs (like rent or insurance), 30% for wants (like entertainment) and 20% for savings. It’s important to adjust those percentages according to your needs, said Espinal. She says it’s important to also work on other savings goals, like investing or buying a home.

It’s also important not to stretch yourself too thin, said Espinal. One way to balance out your budget is joining the gig economy. A side hustle shouldn’t feel like a second job, but a way to make money off of something you’re already doing, said Niqua. 

When Niqua started her debt-free journey, she needed a way to keep herself organized and accountable. As a visual person, she created her own spreadsheets to keep track of her progress. She realized that other people may benefit from keeping track of their own finances. In December 2020, she launched her Etsy shop Financially Winning, where anyone can purchase downloadable financial spreadsheets, receive financial coaching and reach step-by-step financial explainers.  

Niqua is able to pay off her student loans and contribute to her savings goals because she created her own hybrid approach to her finances.

“It depends on how you want to split the pie,” she said. “ I came up with a hybrid approach where I could invest a little bit, contribute enough to get a 401(k) match and use the remaining money toward my student loans.” 

Image: Getty | monkeybusinessimages