As student loan debt becomes more and more common among college graduates, a new study indicates conversations on the topic should include retirement savings too.
Research from the TIAA-MIT Age Lab found that 84% of Americans with student debt report their repayment impacts their retirement savings. Many are not saving at all for retirement and more than a quarter of them say the reason is their student loan repayment. These statistics are particularly troubling with current trends suggesting that half of all Americans will end up financially vulnerable when they retire.
Another study from the TIAA-MIT Age Lab discovered that, along with putting off saving for retirement, young college graduates are starting to put off major life milestones other generations took for granted, like getting married, having children, or buying a home. Clearly, as graduates begin their careers and live with their student loan debt, they face a difficult balancing act between the obligation to pay off that debt with their other financial goals.
Because new graduates and young adults are choosing to pay off their student loans rather than save for retirement, they may actually lose the chance to take advantage of compound interest of their savings. The compound interest creates a snowball effect with the money in a savings account, adding interest based on the total balance in the account. If a person were to start saving earlier, they would have a larger balance for compound interest to work on. And yet, research is showing that college graduates with student loan debt, regardless of the amount, only accrue about half the retirement wealth by the age of 30 as those graduates with no student loan debt.
This is a worrisome situation for Americans of all ages, although student loan debt is often stereotyped as a “millennial” issue. While it’s true the majority of student loan borrowers are in their 20s and 30s, more and more older Americans are finding themselves strapped with student loan debt as well. On average, Americans aged 50 and older currently hold about 20% of the total balance of the country’s student loan debt. These borrowers are often parents or grandparents who are borrowing to help a loved one attend college. They face a unique challenge. Because they are closer to retirement, they have fewer years in the workforce to catch up on retirement savings and less time to pay back student loans while they have regular income.
Why are so many people pursuing a college education? Because it is still viewed as one of the smartest investments someone can make in themselves and their financial future. Many employment opportunities require some sort of college degree and that trend seems to only be accelerating.
Because a college degree is so valuable, the student loans that fund them can lead to an ultimate return on investment in the form of a higher lifetime earning and employment rate. And at the societal level, college education continues to make a difference. Statistically, college graduates vote at nearly twice the rate as those with lower levels of education and they tend to report better health throughout their lives.
Student loan debt to fund these valuable college educations is rising. At the close of 2019, it totaled approximately $1.6 trillion, which equals a 300% increase in the last decade. While the numbers are staggering, people have borrowed to fund their education for generations. The concern and the challenge borrowers face are to their own financial lives and the overall impact of their student loans on their decision-making. In order to solve the problem, multiple areas of our society will need to work together to create a more financially stable and sure future for student loan borrowers.
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First, borrowers and their families must make an informed decision by gathering sufficient information on all of their borrowing options, including the rules, obligations and benefits of each. In addition, they need to research projected salaries for a student’s desired degree and weigh that with how feasible it will be in the future to pay back a student loan.
One way to help students - young and old - is for colleges and universities to provide the financial education and counseling students need. The Council on Graduate Schools (CGS), along with TIAA’s support, compiled programs that outline best practices in financial literacy for higher education. Additionally, CGS has developed a resource called GradSense, meant for students considering a graduate degree. GradSense helps students know the average debt levels for those working toward the degree they are interested in and the average salary levels of those in their desired career. With these tools, more students can better understand how their degree and student loan debt could affect their future earnings.
Another focus colleges and universities should adopt is on degree completion. Students unable to graduate often can’t pay off their student loans, even those of smaller amounts. Some actually end up worse off from the financial burden of the student loans they can’t pay back. On average, the default rate for those who aren’t able to graduate is about 25%. For those who graduate, it’s just 9%. Degree completion is a key factor in how student loan debt will impact a person’s financial life for years to come.
Employers can also positively contribute to the student debt situation by making financial advice, counseling or coaching available to their employees, either directly or through retirement plan providers. It has become more and more apparent that advice and coaching are key elements in helping people navigate and weigh out the financial demands of student loan debt, retirement savings, and savings for those big lifetime milestones.
Some employers are already using creative approaches to help and encourage their employees to save for retirement. Many are starting to contribute to or match funds employees save in retirement accounts and some are offering other benefits and incentives to those employees paying off student debt.
Policy makers and government bodies can also improve the situation by enacting laws and regulations encouraging people to save for retirement while also paying down student debt. There have already been several potential solutions that deserve some consideration. One idea is to simplify loan programs and leverage income-based repayment options. For instance, with employer “matching funds” programs, the IRS approved such arrangements while studying other options. A bill supported by both parties could make this provision permanent.
Government officials also must look at the overall financial literacy of Americans. Recent years have shown low levels of financial literacy hurt people’s ability to manage their finances and make beneficial decisions. Higher financial literacy levels have been linked to behaviors like saving for retirement, having an emergency fund, and tracking spending – all of which lead to financial wellness. But since the Great Recession, financial literacy skills have steadily declined, according to a study from the FINRA Investor Education Foundation. The sharpest drop was seen for Americans aged 18 to 34.
Only 20 states currently require high school students to learn some amount of financial literacy skills. Legislation has been passed or is pending in several states with hopes that other states will follow. This would make constructive steps forward in repairing and improving the country’s financial literacy as a whole.
With the combined efforts of many people and organizations, we will see people of all ages start to successfully manage their finances and navigate paying off their student loans without sacrificing their retirement savings. While it continues to be a delicate balance, preparing financially for a secure retirement is critical for every person and family. There are enough challenges in our day to day lives; we shouldn’t let student loans become one more mountain to climb.