Student loan borrowers are falling behind in retirement savings, study finds

Americans holding student debt always have smaller 401(k) balances than their debt-free peers regardless of how much money they make, according to a study by the Employee Benefit Research Institute (EBRI).

Student debt-burdened employees earning less than $55,000 a year have 401(k) balances that are between 1.3% and 7% smaller than those without payments.

Surprisingly, this gap grows disproportionally among those earning $55,000 a year or more.

Within this group, employees with student loan payments who’ve been with the company for less than five years have an average 401(k) balance of $46,015, compared to $62,402 for those without payments.

Meanwhile, employees who are paying off student loans and have been with the same company for five to 12 years have an average 401(k) balance of $86,109, compared to the average $107,687 of debt-free employees.

The gap is more than $13,500 for those who’ve worked at the company for 12 to 20 years and nearly $25,000 for those who’ve been with the company for at least 20 years.

“The paying of student loan payments had a significant impact on the level of contributions of those contributing,” EBRI researchers wrote before adding the caveat that “some of the impact of student loan payments appeared to be muted by the existence of employer contributions and [...] automatic enrollment plans.”

EBRI’s study evaluated the retirement savings habits of more than 50,000 people between 2017 and 2019, so it doesn’t factor in the impact of the pandemic.

After a more than three-year hiatus from student loan payments during Covid, Americans appear to be struggling to get back in the habit of paying their bills.

Luckily for them, a new federal law allows employers to match student loan payments as 401(k) contributions.

SECURE 2.0 Act to the rescue?

As of January 2024, student loan borrowers may not have to choose between topping up their 401(k)s or paying down their student loans.

In fact, Section 110 of the SECURE 2.0 Act allows Americans to treat student loan payments as “elective deferrals.”

This provision—which was signed into law by the Biden Administration in 2022 but came into effect last month— “is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans.”

This basically means that employers can match all or part of their employees’ student loan payments into a workplace retirement plan.

This is a big deal for workers, as matching employer contributions makes all the difference in retirement planning. As Creditnews recently reported, automatic employer contributions are one of the biggest drivers of savings for younger generations.

With the U.S. presidential election less than ten months away, the Biden Administration is looking for other ways to help student loan borrowers.

Student debt relief is still on the table

The Department of Education is planning another “rulemaking session” for Biden's so-called Plan B this week to discuss which borrowers may qualify for student debt cancellation.

This comes after the Biden Administration successfully canceled $136 billion worth of loans for more than 3.7 million borrowers, followed by $1.2 billion in relief for an additional 153,000 borrowers.

After the Supreme Court struck down Biden's initial attempt, Plan B is a sort of regulatory workaround that seeks to expand which students qualify for debt relief due to “financial hardship.”

Students who owe more than they borrowed, those in repayment for at least 20 years, and graduates of lower-tier schools are likely to qualify under Plan B.

If Plan B works out, there’s a good chance student loan borrowers will increase the amount of money they contribute to retirement each month.

The EBRI study found that employees greatly increased their 401(k) contributions when they were able to stop making student loan payments.