How Student Loan Debt Impacts Retirement Savings

The Financial Wellness/Student Debt Connection

If your workforce includes recent college graduates, it’s likely that some of them have debt associated with their college years.

Student debt may play a large part in the finances of these young (and even not-so-young) employees; that’s why a complete picture of employee financial wellness should consider it. In addition, carrying student debt may play a role in how much workers are saving for their eventual retirement. Both of these are good reasons for employers to take an interest in the impact of student debt on their workforce.

The amount of student debt nearly tripled between 2005 and 2017, according to a recent study. While employees and employers alike may benefit from a workforce with more education and a higher percentage of college degrees, each may also experience negative results from the debt that often accompanies a degree.

Among individuals studied for the report there were two important, and perhaps obvious, findings. First, college graduates are better off financially than are peers who attend college but do not graduate. And second, those who graduate without debt experience better financial outcomes than those who have debt.

Little Impact on Participation, but What About Account Balances?

What is the effect on 401(k) savings for each group? On the surface, it appears the answer is “not much,” at least in terms of 401(k) plan participation. Young workers with student loans tend to participate in available plans about as frequently as do those without such loans. Even the size of the student loan does not seem to impact participation much.

However, for those at the age of 30, there was a difference in the amount of retirement savings between the groups. Individuals with loans but no degree had saved less in a retirement plan at age 30 than did the group who graduated. (In fact, this was the case for people with no college debt, too, whether or not they had graduated; retirement plan assets at age 30 for graduates without debt reached $18,200 on average, compared to $5,400 for those without a degree and no student debt.)

For workers with the smallest amount of student debt — those below the 25th percentile — retirement savings averaged $9,000 for graduates and $5,100 for non-graduates. Across the board, the numbers were similar for workers who had graduated: those in the mid-range of student debt had saved $9,100 for retirement, and those with the largest amount of student debt had put aside $9,300. Non-graduates had not saved as much. Those in the middle had set aside $3,600 and those with the greatest amount of student debt but no degree had saved just $2,200 for retirement.

Based on those savings figures at age 30, it appears the amount of student debt has less of an impact on retirement accumulations than does the mere presence of the debt. This suggests that workers are often mindful of their debt, and that it factors heavily into their decision to save — or not. Employers can use this information to educate employees about financial wellness, paying close attention to communicating about how to pay off debt.

Learn more about student debt and its impact on 401(k) savings in the paper from the Boston College Center for Retirement Research.


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