Vanguard: Paying Down Higher-Interest Debt, Maximizing Matching Contributions Lead to Best Retirement Outcomes

Not all debt is equal, but participants acting as if it is may be detrimental to their financial well-being, according to a recent study from Vanguard.

In 2025, more than 75% of U.S. households carried debt, with balances reaching nearly $19 trillion, the Federal Reserve Bank of New York reported in its “Quarterly Report on Household Debt and Credit” from the fourth quarter of 2025.

In examining the link between participant assets and debts, Vanguard’s study found that participants in the company’s 401(k)plans made two critical mistakes when their households failed to coordinate their borrowing and spending decisions: paying down higher-interest debt too slowly and paying off lower-interest debt too quickly.

Chipping away at the bigger burden too slowly meant participants often carried revolving credit card debt while holding cash or while contributing more than needed to earn their 401(k) employer match, Vanguard’s report stated. Meanwhile, scaling back the lower-stakes debt too quickly meant participants made extra payments on mortgages, student loans and car payments while forgoing full employer matches. Choosing to pay down the “wrong” debt first carried retirement consequences.

“Simple rules of thumb can help people avoid these money mistakes,” the Vanguard report stated. “Paying down higher-interest debt or taking full advantage of an employer match are good ways to maximize total returns and grow wealth.”

Slowly Paying Down High-Interest Debt

Credit card debt typically carries much higher interest rates than the other common types of household debt, making it expensive to leave unpaid, Vanguard’s report noted. Auto loans, mortgages and student loans generally have lower interest rates and are therefore less costly for participants to carry.

According to Vanguard’s report, a plurality of Vanguard investors ranging in age from their 20s through 60s carried both higher-interest credit card debt and one or more installment debts in 2023—in this case, mortgages, auto loans or student loans—with debt burdens peaking among those in their 30s and 40s. When participants err by making debt paydown decisions without considering long-term saving and investing decisions, the report warned, their financial well-being can suffer.

Vanguard’s study found that 53% of 401(k) participants carried revolving credit card debt in 2025, 60% of whom contributed more to their retirement account than the minimum required to earn their company match. Participants contributed an average of $3,900 more than the employer match, while holding an average of $4,500 in debt.

While contributing to a 401(k) plan is one of the only financial decisions that generates a higher return than paying down credit card debt, contributions beyond the employer’s match only yield investment returns, the report cautioned. With the average credit card interest ranging from 21% through 22%, participants with credit card debt could increase their overall wealth by temporarily dropping their retirement contributions to the match threshold and using the newly available cash to pay down their credit card debt.

Vanguard estimated that the debt paydown strategy would take an average of slightly more than one year. Participants enrolled in automatic escalation would continue to see their contributions increase each year, even if they did not actively readjust their contribution level after paying off their debt.

Quickly Paying Off Lower-Interest Debt

While Vanguard advised paying off higher-interest debt quickly, taking care of the lower-hanging fruit too fast is not as “clear-cut,” the report stated. Certain debts, such as mortgages and student loans, have much lower interest rates than student debt and often bring participants opportunities for tax subsidies, partially offsetting their burden.

According to the study, debt prepayment is a common phenomenon among participants: 50% of Vanguard investors who held installment debt made extra payments toward their debt at least once per year. Prepayment tends to increase with income, proximity to the end of a loan term, and age until the 50s and 60s, when individuals may have fewer responsibilities and are likely to make efforts to finish paying off big debts before retirement, the report stated, citing previous industry research.

Those prepaying may still miss opportunities to maximize their retirement returns, however. Among Vanguard 401(k) account holders who prepaid their debts, 30% had not contributed enough to their 401(k) to maximize their employer match, the report found. Subpar contributions were made by participants with all types of installment debts, including 26% of mortgage loan prepayers, 35% of auto loan prepayers and 31% of student loan prepayers doing so.

Pre-payers missed out on an average of nearly $1,100 per year, the Vanguard’s study reported. In the long term, prepaying a debt for 10 years while failing to get the full benefit of the employer match could lead to an estimated $120,000 less saved at retirement age.