A ‘Reckoning’ on Student Debt

The massive amount of student debt and its effect on saving for retirement are in sharper relief than ever, argues a recent analysis. 
Student debt is an even more serious concern today as many of the young adults who are joining the workforce have amassed a considerable debt, writes Kara Melber in “Student Debt and Retirement: The Pupil–Participant Dilemma,” a recent entry in the Corporate Insight blog. 

Melber reports that student debt in the United States amounts to $1.71 trillion, a figure $740 million below total credit card debt. She cites a study in which the Boston College Center for Retirement Research found that those with bachelor’s degrees who have student debt have saved “significantly less” for retirement by age 30 than those without such debt. She also cites a study in which Fidelity found that 69% of respondents with student debt either (1) reduced or stopped contributions to retirement accounts or (2) took distributions from their retirement savings to address what they owe. Not only that, she says, student debt also affect parents who help students pay for higher education. 

Melber notes that the government has devised repayment plans, but that under those plans it could take many of those who have such debt more than a decade to satisfy it. And that, she warns, will have a ripple effect. To wit: monthly payments to cover student debt will affect the ability of those making them to save for retirement. In addition, that will lessen the effect of compounding and returns on investment, further reducing the size of their savings. 

And student debt and retirement saving may only become more closely intertwined, Melber suggests. She observes that recent extensions of CARES Act provisions make it possible through 2025 for plan sponsors to make tax-free contributions toward employees’ student loan assistance, without increasing an employee’s gross taxable income. Not only that, she notes, legislation now on Capitol Hill could allow employees to direct funds to satisfy their student debt rather than contribute to retirement accounts. 

The Retirement Industry

“The relationship between the retirement industry and student loan assistance will only continue to grow,” Melber writes. “The retirement industry has opened its doors to helping participants balance paying down student debt while still contributing to their retirement plans,” she continues.

The effects are especially pronounced on recordkeepers, Melber says, writing that they “face a reckoning when it comes to student debt and retirement.” She suggests that recordkeepers may want to consider working with third-party firms to offer refinancing and educational resources. Doing so, Melber argues, will help participants, better enable companies to attract employees and lead to better saving for retirement.