You Can Still Build Wealth Even With Student Loan Debt — These Experts Reveal How

If you’ve recently graduated from college — or you’re about to graduate college — you may not be thinking immediately about how to build wealth and save for retirement one day, especially if you’re also carrying tens of thousands of dollars of student loan debt. You may be torn between two choices: put money toward that pile of student loans or build wealth for the future?

For many people, student loan debt will be the first debt they’ll carry in their lives. The looming prospect of student loan debt repayment can feel intimidating, or even impossible to overcome. That’s why it may seem easier to put off long-term financial goals now in favor of paying off student loans.

But student loans shouldn’t stand in the way of building wealth. Most importantly, your early 20s are an incredibly important time to begin investing, because you’ll begin accruing compound interest, or collecting interest on top of interest. This is especially important when investing for retirement: The earlier you begin, the more your savings will grow by the time you reach retirement age.

Bankrate spoke to finance experts for their recommendations for building wealth early on in your career, even if you have student loan debt. Their advice shows how, with a little financial planning, such as avoiding high-interest student loans, saving early in life and staying on top of your debts, you can juggle building wealth while paying off student loan debt.

These interviews have been edited for length and clarity.

What can people with student loan debt do to put themselves in a good position to start building wealth upon graduation?

Understand your student loan payment options

If loans are needed to fill the (student loan) financing gap, prioritize zero-interest and low-interest federal loans over high-interest private loans. Understand the interest and repayment terms and explore possible repayment plans that could reduce the long-term financial burden.

— Xiaoqing Eleanor Xu, Ph.D., CFA
Professor of finance and co-director of master’s of financial technology and analytics, Seton Hall University Stillman School of Business

What this means for you

Ultimately, if you pay off your student loans quicker, you’ll pay less in interest. If you have federal student loans, there are several repayment options available to you. To minimize your interest costs, you’re best off with:

• Standard plan:
  

  Payments are a fixed amount so that you pay your loans within 10 years.

• Graduated plan:
  

  Payments are lower initially than increase roughly every two years. Payments are designed to pay off your loans within 10 years.

If you need more room in your monthly budget to account for student loan payments, you might instead opt for income-driven repayment (IDR) plans. Unfortunately, they won’t help you avoid increasing tolls of interest, unless you have federal Direct Subsidized Loans and don’t plan to stay on IDR for more than three years:

• Pay As You Earn (PAYE) plan:
  

  Payments are 10 percent of your discretionary income. For subsidized loans, if your monthly payments are less than the monthly interest you’ve accumulated, the rest is paid by the government for your first three years under the plan. For example, according to the U.S. Department of Education, if your monthly payment is $30, but you’ve accumulated $50 in interest, the government will pay the remaining $20.

• Income-Based Repayment (IBR) plan:
  

  Payments are 10 percent to 15 percent of your discretionary income, depending on when you received your first loans. Like the PAYE plan, for subsidized loans, any monthly interest accumulated over your monthly payment is waived for the first three years.

Open a retirement account now (yes, now)

Essentially, graduating with student loan debt and (paying) back that debt crowds out other wealth-creating activities, like investing in the stock market or purchasing a home. The best money move for someone just graduating is to fully participate in an employer’s 401(k) plan — if one is offered. Perhaps the worst financial mistake anyone can make is turning down free money. Contributing the max to your 401(k) also reduces your tax bill. People should do whatever it takes to participate in their company’s 401(k) plan to the level to get the full employer match, even if that means taking longer to pay back student loan debt.

— Robert R. Johnson, Ph.D., CFA, CAIA
Professor of finance, Creighton University Heider College of Business

To build wealth, start early. Building wealth is something that needs to be intentional and it requires patience. For new graduates, it is often helpful to live below your means for a few years to jumpstart the process of building wealth. Funds invested in your mid-20s have the potential to increase eight to 10 times over by the time you reach age 65.

— Jeff Jones, Ph.D.
Associate dean, Missouri State University College of Business

Stay on top of your debt and your budget

Students graduating with college debt should create a budget and establish clear spending and savings goals even before graduation to help them manage their finances. They should also prioritize paying off their highest-interest loans first to reduce their debt faster.

— Xianwu (Sean) Zhang, Ph.D.
Assistant professor of finance, John Carroll University Department of Economics and Finance

Pay down your highest interest rate debts first. You want those liabilities off your books. Live below your means, be open to flexibility in your career path and save aggressively while you’re primarily providing for yourself rather than a family.

— Daniel McKeever
Assistant professor, Binghamton University, State University of New York School of Management

(Recent graduates need) to make sure to pay himself/herself first. That means making saving and investing a top priority and not deviating from that plan. Saving and investing while paying off student debt often requires a person to live below the lifestyle level that their income level might typically support.

— Jones, Ph.D.
Missouri State University

First, having to (pay) student loan debt upon graduation is not a wealth-accumulation death sentence. In fact, having to manage a budget straightaway may prove to be a (useful) skill mastered. Since the largest component of keeping a high credit score is timely payments, it’s vital all loan payments remain current. How much you save is more important than where those funds are invested.

After creating a budget and tracking spending, asking yourself, “Do I have an expense issue or a revenue problem?” will provide some clarity as to a path forward. Since it’s not just about treading water — but rather advancing your financial future, perhaps a second job — or a change of employment — will become necessary. Eradicating debt is the most impactful action you can take — whether (at age) 23, 43 or 63.

— David Johnston
Adjunct professor of finance, College of New Jersey School of Business

How to set up a budget

Before starting your debt payoff journey, you’ll need a budget. Sit down with last month’s bank and credit card statements and make a list of all your recurring monthly expenses. That may include your:

• Needs:
  

  • Rent or mortgage
  • Utilities, including power, gas, sewage, trash, internet and/or cable
  • Minimum debt payments, including student loans, credit card debt, car loan or other payments
  • Insurance, including car, pet or post-tax health insurance
  • Recurring medical payments, such as therapy or medications
  • Groceries, auto fuel and household goods, such as cleaning supplies

• Wants:
  

  • Discretionary spending, such as spending on restaurants, nights out and hobby items
  • Subscriptions, such as streaming services
  • Memberships, such as gym memberships

Once you know where your money is going every month, you’ll be able to determine how much of your take-home pay you can put toward longer-term goals of debt repayment, as well as investments, savings and any other wealth-building strategies. The 50/30/20 rule advises spending 50 percent of your take-home income on expenses, 30 percent on discretionary spending and 20 percent on investments, savings and debt repayment.

Even if your expenses are more than 50 percent of your income, the rule is a good starting point to consider how much of your income you have available to funnel toward your longer-term goals. Make sure to also allow room in your budget for discretionary spending — even if you want to spend all your extra income on your longer-term goals for debt repayment and savings, it’s just not realistic for most people.

Financial advisors can help with all your financial questions

Financial advisors can help with everything from budgeting to retirement planning. Many work with a wide range of people, regardless of their asset amounts.

Learn more

The bottom line

Even if you’re paying a lot in student loans, you can still build wealth early in your career. With a little financial planning, you can still make those loan repayments, invest in retirement and save for emergencies.

For more on how to invest early in your career, check out Bankrate’s Investing 101 guide and tips on how to start investing in your 20s.

Experts interviewed by Bankrate

Bankrate interviewed six experts from universities across the country for their insights about building wealth:

Robert R. Johnson, Ph.D., CFA, CAIA
Professor of finance, Creighton University Heider College of Business

Robert R. Johnson, PhD, CFA, CAIA, is a Professor of Finance at Creighton University’s Heider College of Business. He is also principal in Economic Index Associates. Until April 2018, he was president and CEO at The American College of Financial Services in Bryn Mawr, Pennsylvania. He was formerly senior managing director at CFA Institute in Charlottesville, Virginia and was responsible for all aspects of the CFA Program for the majority of his 15-year tenure. In 2013, he received the Alfred C. “Pete” Morley Distinguished Service Award from CFA Institute in appreciation of his leadership, stewardship and outstanding service.

Prior to joining CFA Institute, Johnson was a professor of finance at Creighton University from 1984 through 1996. Bob won several teaching awards and in 1994 received the university-wide Robert F. Kennedy Award for Teaching Excellence. He has over 80 refereed articles in leading finance and investment journals. His publications have appeared in the Journal of Finance, Journal of Financial Economics, Journal of Portfolio Management, and the Financial Analyst Journal, among others. Johnson has served on the board of RS Investments, a San Francisco-based investment management firm and on the board of The Virginia Institute of Autism.

David Johnston
Adjunct professor of finance, College of New Jersey School of Business

David Johnston is the managing partner of Amwell Ridge Wealth Management and a Certified Financial Planner. He built the firm around the fundamental belief that a proper financial plan begins with risk management, infuses innovative, enhanced diversification within an investment portfolio, and provides for an efficient transfer of wealth to the next generation. Johnston is an adjunct professor at the College of New Jersey School of Business. Johnston earned a BS in finance from the College of New Jersey.

Jeff Jones, Ph.D.
Associate dean, Missouri State University College of Business

Jeff Jones is an associate dean in the College of Business at Missouri State University. His primary research interests are in the area of banking and financial institutions, specifically the impact of opacity on the valuation of banks and systemic financial crises.

He has taught a wide variety of finance courses, such as investments, portfolio management, personal financial management, derivatives and alternative investments, fixed income securities, financial markets and institutions, bank management and corporate finance. He has also taught courses outside of finance, including business foundations, principles of accounting and basic economic theory.

Daniel McKeever
Assistant professor, Binghamton University, State University of New York School of Management

Daniel McKeever is an assistant professor at the School of Management at Binghamton University, State University of New York. A former economist at the Commodity Futures Trading Commission, McKeever has research and teaching expertise in risk management.

Xiaoqing Eleanor Xu, Ph.D., CFA
Professor of finance and co-director of master of financial technology and analytics, Seton Hall University Stillman School of Business

Eleanor Xu is a Professor of Finance at the Stillman School of Business, Seton Hall University (SHU). She has published over forty influential research articles in investments, fixed income, and financial markets, with her work widely cited by professional outlets such as Bloomberg, CNBC, and Wall Street Journal. Xu directs SHU’s CFA University Affiliation Programs in Finance, Mathematical Finance, and Financial Technology, and serves as Co-Director of the Master of Financial Technology and Analytics program. She previously chaired SHU’s Department of Finance and taught at Saint Louis University. Xu earned her Ph.D. in Finance from Syracuse University.

Xianwu (Sean) Zhang, Ph.D.
Assistant professor of finance, John Carroll University Department of Economics and Finance

Sean Zhang is an Associate Professor of Finance at John Carroll University, where he directs the Financial Planning and Wealth Management Program (a CFP Board Registered Program). His research on household finance topics has been published in leading financial planning journals and won best paper awards at national conferences. An excellent educator (recognized by the Boler College of Business at JCU), he holds a Ph.D. from Texas Tech University and the Certified Financial Planner certification.