College Debt Can Limit 401(k) Saving

The share of students borrowing money to pay for college increases year after year, and they’re borrowing more every year.  Total student debt, adjusted for inflation, has tripled in just over a decade.

The loan payments, which can be a few hundred dollars a month, take a big bite out of young adults’ still-low levels of disposable income. The debt makes them more prone to bankruptcy and lower homeownership rates.

A key question is whether this pressing financial obligation might affect their preparation for a retirement that is several decades away.  Here’s what researchers Matt Rutledge, Geoff Sanzenbacher, and Francis Vitagliano of the Center for Retirement Research learned about student debt:

• By age 30, the college graduates who are loan-free have saved two times more in their retirement plans than the graduates who are paying off debt. (Perhaps surprisingly, the presence of student loans do not seem to affect the amount saved by students who didn’t graduate, though they do have substantially less in their 401(k)s than the graduates.)
• The amount owed by college graduates with loans does not matter. The mere existence of the debt is enough to constrain saving.
• College debt has little influence on a young adult’s initial decision: whether to sign up for the employer’s 401(k) plan. Plan participation is the same for graduates, regardless of whether or not they have loans. Participation is also roughly the same for non-graduates with and without loans.

This study gives a mixed picture of college debt’s impact. But the young adults who do fall behind on saving will pay for it decades from now, when they’re ready to retire.

The problem is also likely to grow. Most of the young adults in this study borrowed money before the big surge in debt in recent years.

Student loans are clearly a big concern.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof. This research was conducted with restricted access to Bureau of Labor Statistics (BLS) data. The views expressed here do not necessarily reflect the views of the BLS.