The Financial Trifecta: How To Deal With Student Loans, Retirement Savings, And A Mortgage

Everyone's priorities and circumstances are different, but here are some general pointers.

Businessman Shaking Piggy BankToday, most lawyers want to achieve three financial milestones in their lives: paying off student loans, buying a house, and saving for retirement. But with an unpredictable stock market and increasing costs for education and housing, most will be lucky to achieve even two of the three.

On the internet, you’ll find all kinds of opinions advice on how to manage your finances. But there is no correct answer as everyone’s priorities and circumstances are different. And many don’t have a choice.

If you are wondering how to deal with the financial trifecta, perhaps the best place to start is to analyze the pros and the cons of each.

Paying Off Student Loans

Pros – One large, nondischargeable monkey off your back. Paying down student loans can improve your credit rating and save you from having to deal with an agency with brutal collection powers. Federal student loan debt is exempt from state consumer protection laws thanks to the Supremacy Clause. They can also intercept tax refunds and Social Security payments from delinquent accounts.

Cons – Nothing tangible to show for it other than a participation trophy from your student loan servicer. High likelihood of turning into a curmudgeon who thinks everyone else should pay off their student loans instead of whining online.

Bottom line – If eligible, get on an income-based repayment plan as soon as possible. At some point, you will know whether you can pay the loan in full or whether you should seek loan forgiveness. If you are sure that you can pay off the loan, refinance to a lower interest rate. If you are aiming for loan forgiveness, make sure you are prepared to minimize the cancellation of debt income tax or apply for PSLF (as soon as you can, in case it goes away).

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Buying A House 

Pros – You will lock in a steady monthly payment if you live in an area where rent prices are constantly rising. Also, if you have some equity in the house, you can use it to pay down student loans and other debts at a lower interest rate. The interest paid on the home equity loan may be tax-deductible. Finally, if you sell the house after living in it for at least two years, up to $500,000 of the profit is tax-free (depending on if you’re married or not).

Cons – You will need to save to pay a substantial down payment. Also, you’ll have to pay for maintenance and major repairs, which tend to come at the worst time. If you sell the house not long after you buy it, you will most likely lose a lot of money.

The bottom line – Don’t buy a house unless you can afford the payments, really like it, and plan to live there for some time. Don’t buy a house because everyone else is doing it. Just like your car and your kids, no one will care after a few months. For those on the fence about buying, I suggest reading Home, Sweet Rental: Busting The Hype Of Homeownership (affiliate link).

Contributing To An Investment/Retirement Account

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Pros – Most retirement plans come with tax benefits. Also, most investment vehicles have better return rates than those from conventional savings accounts (although there is also a risk of loss). Your employer may also match any contributions you make to a plan.

Cons – It may be difficult to get your money out. You cannot withdraw from retirement accounts for many years (with limited exceptions) without facing taxes and penalties. Also, some investment vehicles may not be readily liquid since they could be tied up in stocks, bonds, real estate or something else. Finally, gains or dividends may constitute taxable income, which will reduce the annual rate of return. Compare this with paying down student loans, where you are not taxed on the interest you don’t have to pay as a result of paying down the principal.

Finally, what good is having a retirement account if most of it will be used to pay off your still-remaining loans? Your 35-year-old children living at home will be disappointed.

The bottom line – It might be a good idea to set up some kind of retirement account just as a matter of habit and for the tax benefits. But be wary of projections that assume a certain annual rate of return, like 7 or 8 percent before taxes. No one can guarantee a certain percentage. The only entity getting a guaranteed 7% rate of return is the federal government when we pay the interest on our student loans.

If you are still unsure, it may be best to consult a fee-only financial planner for more objective advice.

Also, if you attend one of these investment seminars and the rate of return sounds too good to be true, it likely is. Ponzi schemes are getting more sophisticated every year.

Some Other Things To Think About

After reading the above, you may still be unsure as to which task you should take on first. Or you may choose to do a combination of the above, which sounds as complicated and boring as eating a balanced diet or diversifying your investments. I would like to offer some additional thoughts.

For most people, the goal is to maximize the dollars saved. In that case, the best bet is to pay down the loans as quickly as possible or at least refinance them to get lower interest rates.

For those who actually want to enjoy life and think delayed gratification is a government conspiracy, one option is to buy a house and hope the equity can be used to pay off the loans with a small nest egg left over.

Finally, whatever you do, consider the effects on your health. You might choose to work 20 hours per day for some idiotic tyrants hoping to make as much money as possible and pay off your debts quickly. But the stress and lack of sleep during your prime years might have an effect on you later. Or you may choose to live it up and pay only the minimums. This means you may be living paycheck to paycheck despite making a lot of money. You might have trouble sleeping because you worry about losing your job or a downturn in business. Once that happens, your life may turn upside down. That can’t be good for your health.

P.S. This post does not, and is not intended to, provide legal, tax, or accounting advice (as if you would take such advice from a pseudonymous columnist on the internet). Please consult your own legal or financial advisers before engaging in any transaction.


Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.