Loans to pay for an education: an investment in the future, but also a drag on it. Research and recent insights suggest that while loans help fund steps intended to improve one’s position, in some ways they can threaten future security by affecting retirement saving. It’s a debt whose effects compound.
Looming Large
Student loan payments—put on hold during the Pandemic—are back, since the moratorium on repaying them was lifted in the Fall of 2023. Initiatives by the federal Executive Branch to forgive student loan debt have largely been ruled by the courts—including none other than the U.S. Supreme Court—to be beyond the scope of its constitutional authority. It has continued to announce debt forgiveness for certain groups, but nevertheless more than $1.7 trillion in student loan debt remains. 
Betterment at Work reports in its 2023 Retirement Readiness Annual Report that 40% of workers have student loan debt to pay—and a majority of them owe more than $10,000.
More than Money
That debt is exacting more than a financial price. Laurel Taylor, Founder & CEO of Candidly in a Jan. 23, 2024 Employee Benefit Research Institute (EBRI) webinar told attendees that the No. 1 source of financial stress in the workplace is student loans, which are starting to come due again.
Betterment at Work says that in 2023, 70% of borrowers felt at least some anxiety about their student debt, and 57% of borrowers said they were “concerned” or “very concerned” about it. And their research shows that student loan debt was the biggest source of financial stress for 15% of respondents.
Not surprisingly, Betterment at Work reports that the younger generations in the workforce—Gen Z and Millennials—expressed the most widespread anxiety, with 81% and 69% respectively saying it created stress for them.
Still, it’s not just looming large for the obvious demographic group. Betterment at Work reports that all generations agreed that student loan debt created anxiety. Further, Taylor noted that people age 50 and older are involved, since some of them were co-signers on younger family members’ loans and some took loans to help them pay for education. “Student debt is Mom and Dad debt, spouse debt, and grandparent debt,” she said.
Desperate Times
Desperate times call for desperate measures, it is said, and student loan debt has resulted in tough choices for some borrowers. Betterment at Work reports that in its 2023 study, 46% took a second job or additional part-time work in the last 12 months, far outstripping the 25% of respondents without student loan debt who took such a step.
Not only that, 13% told Betterment at Work that they had tapped emergency funds to help make education/student loan payments.
Loans and Retirement Saving
It’s a mistake to think that student loan debt and retirement saving are not related, Taylor, suggested during the webinar. She called dispelling the notion that student debt is distinct from retirement savings “myth busting.”
Taylor is on to something, Betterment at Work indicates in its 2023 finding that student debt has affected their ability of 64% of borrowers to save for retirement. For 19% of them, that meant pausing or reducing the size of their contributions to their 401(k)s—and, said Taylor, some stopped contributing altogether in order to pay their debt.
Many people always planned to go to college, but didn’t know that meant that they would miss out on two decades of compounding interest on the retirement accounts to which they either contributed less than they otherwise would have or avoided altogether, Taylor remarked.
Implications for Employers
Help from employers would be most welcome, Betterment at Work found, particularly when it comes to attracting and retaining employees.
They report that in 2023, a student loan financial assistance or repayment program was among of the 11 most wanted employee benefits. Further, 21% said they would consider seeking employment with an employer that offered such a program if their employer did not.
Also among the top 11 was a student loan/401(k) matching program, in which an employer provides a 401(k) matching contribution for a payment an employee makes toward their student loan debt.
Taylor added that such a program also would benefit an employer, arguing that it was “good for business to bring more employees into a retirement plan” and that it also would be helpful with nondiscrimination testing.
But don’t expect guidance from the IRS in the short term, say Milo Atlas of the Retirement Plan Forms and Publications Office at the IRS, and Angelo Noe, a Program Coordinator at IRS Return Preparer Office. In responding to a question during a Jan. 23 webinar about changes to the IRS Pre-Approved Defined Contribution Plan Program, they said that student loan payments are not on the IRS’ Cumulative List of projects on which it plans to take action. They said that it is one of the areas that requires “additional guidance which may include model amendment language.”
The Bottom Line
“Student loan debt doesn’t exist in a vacuum—it’s directly related to retirement readiness,” said Edward Gottfried, Senior Director of Product Management at Betterment at Work, in a statement about their 2023 study.
“By supporting your workers with this, you can help them work towards future financial success in more ways than one,” Gottfried continued.
And Taylor struck an optimistic tone, saying that she is “really excited” about student debt no longer being “a retirement plan blocker” and instead becoming a “retirement plan booster.”
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