The Impact of Student Loans on Retirement Savings

Billy McGrath on 09 January 2019

It is not surprising that student loan debt has an impact on retirement savings. What is surprising, however, is that there is no correlation between the amount of debt and the amount people save for retirement. Just the presence of student loan debt is keeping people from saving for their future according to a research brief, “Do young adults with student debt save less for retirement?”, by the Center for Retirement Research at Boston College. 

The student debt balance nearly tripled between 2005 and 2017 with both the percentage of graduates with loans and their average outstanding balance skyrocketing. Student loans, even if the payments are seemingly manageable, have a significant impact on a person’s financial decisions, especially whether or not to save for retirement.

Geoff Sanzenbacher, the associate research director for the Center for Retirement Research, made a number of recommendations for employers looking to promote retirement savings and financial wellness for their employees. Sanzenbacher says that automatic enrollment plans for employees are effective because auto enrolled employees tend to stick with the default payment and do not opt out of the plan.

Employers can also offer student loan debt repayment plans. According to Sanzenbacher, “Payments of loans through payroll may get people over the hump.” Because the payments happen automatically, employees tend not to think about them, which helps them overcome some of the mental challenges of being in debt.

For companies, like those in the tech industry, that are always looking for ways to stay competitive, new benefit options like student loan repayment are a way to attract and retain the best talent. Student loan repayment is especially poignant for young workers as individuals who are more than 30 years from retirement are less likely to think about retirement savings, especially if they are already in debt with student loans.

The report by the Center for Retirement Research sheds light on an important issue for employers and policymakers. When discussing ways to help people save for retirement, policymakers often look for ways to reduce people’s debt. “In reality, however, a young worker with a student loan may focus solely on paying off that loan before shifting to a longer-term objective like retirement savings,” the report said. “[R]educing debt isn’t going to have a huge effect on retirement savings. As long as their debt is still there, it will have an impact.”

Student loan repayment benefits can help employees reduce the amount of time it takes to pay off their outstanding loan balance. Doing so will allow people to turn towards retirement savings sooner.

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