How Does Student Debt Affect Early-Career Retirement Saving?

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This paper examines the relationship between student loans and retirement saving by 30-year-old workers.  Total outstanding student loan debt in the United States has quintupled since 2004.  Rising student debt levels mean that young workers must reduce either their consumption or their saving.  To what extent do these workers cut back on retirement saving?  Existing studies have lacked adequate data or controls for studying this issue, especially for younger workers.  This study uses the National Longitudinal Survey of Youth 1997 Cohort, a larger sample of workers turning 30, and includes detailed controls including school quality, parental background, and the underlying ability of the college attendee.  The analysis focuses on participation in an employer-sponsored retirement plan and retirement assets as of age 30.

This paper found that:

  • The estimated relationship between student debt and participating in a retirement plan is small, and the analysis can rule out any substantial negative relationship.
  • Bachelor’s degree-holders who have student loans have significantly lower retirement assets at age 30 than those without loans, indicating that having a student loan payment each month reduces retirement plan contribution rates.
  • The actual size of the student loan does not seem to matter – those with student loans have lower retirement savings, but retirement wealth accumulation is similar for those with small loans and large loans.

The policy implications of this paper are:

  • College graduates seem to reduce savings in the presence of debt regardless of its size, indicating that policies that reduce student loan burdens or tie loan balances to income will be ineffective at helping graduates increase retirement saving as long as the loans remain outstanding.
  • Instead, policymakers may find it more effective to focus on helping graduates with manageable balances determine what they can afford to save, while helping to put their student debt in perspective.
  • While the presence of student loans seems to loom large in the minds of the cohort examined in this paper (born 1980-1984), more recent cohorts are even more likely to have loans, which will likely suppress retirement wealth accumulation even further.