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How saving for retirement can lower your student loan payment
Boosting your retirement savings isn’t just a good way to save for your future — it can also lower your monthly student loan bill, if you’re a federal borrower on an income-driven repayment plan.
For borrowers on the income-based and pay as you earn repayment plans, monthly payments are calculated as a percentage of discretionary income, which is the amount of taxable income that exceeds 150% of the poverty guideline for your state and family size. That’s $23,475 for an individual (not living in Hawaii or Alaska) in 2025, according to the Department of Health and Human Services.
On the income-contingent repayment plan, your discretionary income is your taxable earnings above 100% of the poverty guideline, or $15,650 for an individual in 2025.
Since 401(k)s, individual retirement accounts and some other retirement plans are funded with pre-tax dollars, the more you contribute, the lower your taxable income will be. Thus, the lower your monthly student loan payment will be. And you can can contribute even more to many of these accounts next year.
Eligible workers will be able to contribute up to $24,500 to their 401(k), 403(b) and other employer-sponsored retirement accounts in 2026, up from $23,500 in 2025, the Internal Revenue Service announced on Nov. 13.
The IRA contribution limit also ticks up to $7,500 for eligible participants, a $500 increase from 2025. Workers ages 50 and over can contribute an additional $8,000 to 401(k) plans and extra $1,100 to IRAs.
As for how much that could affect your student loans, monthly payments are calculated as a certain percentage of your discretionary income, depending on the plan and when you took out the loans:
- IBR (for loans disbursed before July 1, 2014): 15%
- IBR (for loans disbursed after July 1, 2014): 10%
- ICR: 20%
- PAYE: 10%
How much can you save
A single borrower who took out loans before July 1, 2014, doesn’t have children, earns $75,000 a year and takes the standard deduction of $16,100 in 2026 would have discretionary income of $35,425. Their monthly student loan payment on IBR would come out to about $443.
But if that borrower contributed the maximum $24,500 to their 401(k), their discretionary income would drop to $10,925, decreasing their monthly payment to about $137.
Of course, contributing more to a retirement account may not be feasible for everyone. But smaller student loan payments may be a helpful trade-off for some people.
It’s also worth noting that lower monthly payments could mean staying in debt longer, because interest continues accruing and you won’t be bringing down your principal balance as quickly as you would with a higher payment. But borrowers who make eligible payments on an IDR plan are eligible to have any remaining balances forgiven after 20 or 25 years, depending on the plan and when they took out the loans.
The best move for you depends on your individual financial situation and goals. You can use Federal Student Aid’s loan simulator tool to see what different repayment options could look like.
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