How Student Loan Debt Is Affecting Retirement Savings

A new study that looks at the implications student loan debt is having on overall financial security and retirement preparedness finds both positive developments and ongoing red flags.  

In “Student Loan Debt: Who Has It and How Much?,” the Employee Benefit Research Institute (EBRI) reports that the percentage of American families with student loan debt doubled from 10.5% in 1992 to 22.3% in 2016. Since then, however, there has been a leveling off, with the percent having student loan debt declining to 21.4% in 2019. 

But for workers just starting out, as well as for workers nearing retirement who are helping to fund their children’s college education, student loan debt is a pressing financial issue that can interfere with long-term financial security and retirement goals.

Using data from the Federal Reserve’s Survey of Consumer Finances, EBRI examines student loan debt trends going back to 1992, along with demographic characteristics and the amount of other assets held, particularly DC plan assets, as compared between those with and without student loans.

While families with student loans were more likely to have a DC plan, these families had lower median DC balances relative to those families without a student loan. Thus, the higher likelihood of participating in a DC plan is driven by higher incomes resulting from obtaining a college degree, but the presence of student loans leads to lower amounts being accumulated, the report explains. By contrast, families headed by individuals with no student loan debt appeared to be less likely to participate in a DC plan, but when they did, they accrued much higher balances across most cohorts.

According to the data, for families with heads younger than 35 and with a college degree, the median DC balance was $31,000 and the average balance was $46,768 for the families without a student loan, compared with $15,000 and $25,581, respectively, for the families with a student loan. 

More troubling, however, is for those who obtain student loans but do not finish their college degree. They have a lower likelihood of DC plan ownership, and when they do have a DC plan balance, it is smaller than for those who do finish college with a student loan. 

“This latter group is a particularly troubling finding,” says Craig Copeland, EBRI Senior Research Associate and author of the report. “These families end up with the costs, but not the benefits of attending college.”

Additional Findings

EBRI’s brief also shows a number of additional red flags among a variety of demographics. For instance: 

• The percentage of families with heads ages 45-54 having student loan debt grew a whopping 309% between 1992 and 2019, and the percentage of families with heads ages 55-65 having such debt grew 321%.
• Families with heads younger than age 35 with at least a college degree had higher required monthly loan payments than other demographics, with median monthly debt payments representing nearly 5% of family income. 
• Families with a Black or African American head of household were 50% more likely than families with white non-Hispanic heads to hold student loan debt at 20% and 30.2%, respectively.

Overall, the study shows that the median outstanding student loan balance increased from $5,704 in 1992 to $22,000 in 2019—a 286% increase. And the average student loan balance had a similar increase from 1992 to 2019, rising from $12,498 to $40,550 for a 224% increase. 

Employer Policy Considerations

Employers are increasingly recognizing the financial impact student loans are having on their employees, but given the current economic climate, adding student loan debt benefits may be challenging, EBRI notes. In fact, their Financial Wellbeing Employer Survey found that many employers have an interest in providing such a benefit but have not added it, apparently due to the cost and the focus of addressing employees’ more immediate financial concerns.

The most recent COVID-19 stimulus legislation extended through 2025 the allowance for employers to provide a student loan repayment benefit to employees on a tax-free basis. 

Additionally, an increasing number of employers are looking to assist their employees by making employer matching contributions to a 401(k) plan when an employee makes a student loan debt payment, but may be waiting for legislation clarifying that they can do so. 

A 2018 IRS Private Letter Ruling opened the door for employers to make matching contributions, but the ruling only applied to one company. Legislation was introduced in 2020, including in SECURE 2.0, to make this possible universally, but this provision was not included in any of the legislation that was enacted in 2020. “Consequently, widespread use of such an arrangement is muted until clarification of this type of benefit’s legal status is made or legislation specific to this arrangement is passed,” EBRI emphasizes.