The Effect of Student Debt on Retirement

When I visited the U.S. Capitol Visitors’ Center recently to cover an event on the impact of student loan debt on retirement, I was pleasantly surprised to discover that lots of people had already beaten me to it and were patiently waiting for the presentation to start. Who were all these people, I asked? As it turned out, they were mostly newly minted graduates and young employees, eager to find out the effects of their student debt on their retirement plans.

During the event, Prudential Financial, Inc., and The Center for Retirement Research at Boston College jointly unveiled the latest National Retirement Risk Index (NRRI) research, which highlights and examines the implications of student debt on Americans’ retirement readiness. Prudential is the exclusive sponsor of the NRRI.

One of the panelists at the event was Prudential’s Vice President of Strategic Initiatives, James Mahaney,  who noted that the median worker in the U.S. with a bachelor’s degree earned $57, 252 in 2014, while the median worker with a high school diploma earned $34, 736.  “There is no doubt that a college education is valuable,“ Mahaney said. “However,” he pointed out, “families need to borrow wisely when financing a college education, as increased borrowing can impact the future retirement security of students, as well as parents.”

Another panelist, Alicia Munnel, noted that The Center for Retirement Research (CRR) at Boston College recently issued a new Issue in Brief that used the NRRI, which measures the percentage of working-age households “at risk” of being unable to maintain their pre-retirement standard of living during retirement. “Our new study addressed whether student debt could have a big impact on retirement preparedness and the answer was a definitive yes,” noted Munnell, Director of the Center. According to the Brief, if NRRI households had started out with today’s student debt levels, the Index would be 56.2 percent instead of the already alarming 51.6 percent. According to NRRI research, households in their 20s with student loan debt today hold an average of $31,000.

“Attending a good college is a dream of students and their parents alike,” said Mahaney, author of a companion paper on the growing impact of student loan debt on retirement security. “However,” he added,” households are often faced with the issue of paying down student loan debt versus saving for retirement. As the research shows, student loan repayment may impact a household’s future retirement security if the ability to contribute to a 401(k) is affected. If at all possible, the presence of student loan debt should not preclude saving for retirement, at least at a contribution rate that allows an individual to receive the full employer matching contribution.”

Dealing with student loan debt

The companion paper authored by Mahaney offers several considerations for dealing with the effect of student loan debt on retirement.

If you are a financial advisor, you should:

• Help individual clients in setting aside enough assets so as to minimize student loan debt once college is at hand.
• Help clients understand the different ways in which various schools approach financial aid, especially merit aid and grant awards, which can lessen the amount of debt a family will take on.
• Ensure that clients are saving adequately for retirement based on their circumstances. At a minimum, the paper notes, contributions should be set at a rate that takes full advantage of an employer’s 401(k) matching contribution.

If you are an individual or a family member:

• Before selecting a college, carefully consider how to approach financing an undergraduate degree, including becoming familiar with how specific schools provide financial aid. Prudential’s publication, Paying for College: A Practical Guide for Families, provides some guidance.
• If loans must be taken to finance a degree, consider how those loans will be paid back, given career earning potential and available federal loan repayment and forgiveness programs.
• Whether a parent a young graduate, give careful consideration before contributing to a 401(k) plan at a rate less than the contribution percentage an employer is willing to match. The match is “free money, which, once forgone, cannot be recaptured.