Sinking Fast

The threat student loan debt poses on retirement readiness

by Laurel Taylor

The rising costs of college and individual indebtedness have forced policymakers to consider student debt a growing threat to retirement savings.

Collectively, Americans owe $1.6 trillion in student loan debt. Not to mention, it takes many borrowers up to 30-40 years to repay that debt. This prevents individuals from saving for retirement and creating healthy financial futures. In fact, currently, one in five Americans have less than $5,000 saved for retirement.

A large reason for this trend is that many people with student debt delay saving for retirement until their debt is paid off in order to avoid unnecessary interest accrual. That said, in being forced to delay saving for retirement or investing in a 401(k), people are losing significant amounts of money and putting their financial futures at risk.

For example, if someone delays saving for retirement for five years in order to pay off their student debt, the effect on their retirement savings is startlingly large. If the average borrower was able to direct a $393 monthly student loan payment to retirement savings instead, the cost of the mere delay would total $118,000 by the time that person retires. To put the effect of the delay in perspective, that is roughly the median amount of total savings by 55-year-olds in the US today.

Recent Legislation That Helps Until it Hurts

In an effort to lessen the current financial burden on Americans during the COVID-19 pandemic, the federal government included policies within the CARES Act to aid those with student loan debt – allowing them to pause making payments on their student debt without interest accrual for six months. Further, a long-awaited provision in the stimulus bill allows employers to make contributions directly to the student debt of employees, tax-free for up to $5,250 per year. This is similar to the way that employers contribute to retirement savings tax-free.

While these are all wonderful developments, the downside is that much like many other policies in the stimulus package, these benefits will expire on January 1, 2021. Ideally, tax-free employer contributions would continue on past that expiration date. This is the aim of the Employer Participation in Repayment Act which has been in discussions long before the pandemic hit. If employers were able to continue making tax-free contributions to employees’ student debt, this could reduce the total outstanding student debt by one-third over the course of a decade – and ultimately, provide people with the funds they need to invest in their financial futures and properly save and prepare for retirement.

The Path Forward for Individuals and Employers

In order to secure a long-term solution for student debt and its negative implications on retirement readiness, permanent legislation needs to be enacted that eases the tension on borrowers’ marginal dollar. In other words, it needs to be easier to simultaneously pay off debt and make contributions to a retirement vehicle such as a 401(k).

Student loan repayment programs are among the top requested benefits for Millennial and Gen Z employees and as employers strive to remain competitive and meet the needs of their employees, such legislation would be a game changer. Clearly, student loan debt is significantly harming the financial health of Americans. In order to quell this trend and position individuals for long-term financial success and retirement readiness, it’s important to acknowledge these issues and advocate for and enact policies – both in the private and public sectors – that change the narrative on student loan debt.