Outside the Box: Soaring student debt is keeping people of all ages from a stable retirement. Here’s how to help
Student loan debt and retirement savings aren’t typically discussed together — but a new study suggests they should be.
TIAA-MIT Age Lab research shows that 84% of Americans with student debt say that paying it back affects their ability to save for retirement. Of those who are not saving at all for retirement, more than a quarter point to their student loan debt as the reason. Such findings are especially concerning at a time when an estimated half of all Americans will be financially vulnerable when they retire.
Student loan borrowers face a delicate balancing act in their financial lives as they weigh their responsibility to pay off student debt against other obligations and desires. The TIAA-MIT Age Lab study found that in addition to the impact on retirement savings, young people saddled with the highest levels of debt are also delaying major milestones such as getting married, buying a home, and having children.
By delaying saving for retirement, these young people might lose the ability to take full advantage of the powerful benefits of compound interest, that’s the snowball effect that occurs when reinvesting earnings on one’s savings to generate earnings, gets reinvested to create more earnings, and so on. Over time, compounding can substantially grow a person’s savings, so the earlier one starts saving, the better. Yet research shows that college graduates with student loan debt, no matter how much, accumulate about half the retirement wealth by age 30 than graduates without debt.
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It’s important to note that student loan debt is not just a millennial issue. Although the vast majority of borrowers are in their 20s and 30s, Americans age 50 and older hold 20% of the total balance of student loan debt. These are parents and grandparents who have borrowed to fund a loved one’s — or their own — education and who are much closer to retirement than their millennial peers. The challenge for older borrowers is that they have fewer years left in the workforce to “catch up” on their retirement savings.
To be sure, a college degree remains one of the smartest investments a person can make in his or her financial future. A growing proportion of jobs require either a bachelor’s or associate degree or a certificate — and that trend will only accelerate.
Student loans that lead to a college degree can produce tangible returns in the form of higher lifetime earnings and employment rates. On a societal level, a college education also correlates to a host of other positive outcomes: college graduates, for example, vote at nearly twice the rate of those with only a high school education and they report better health throughout their lives.
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As student loan debt has risen to $1.5 trillion — a 300% increase over the past decade — some have implied this presents a risk to U.S. economic stability. That’s simply not the case. Today’s high student debt levels may be a relatively new phenomenon, but borrowing to fund one’s education has a long history. Most borrowers will pay back their loans. The key challenge is more about the impact on individuals’ financial lives and decision-making. In that respect, the way forward for our nation is clear: We must ensure that individuals can continue to fund a college education and reap the benefits it brings without sacrificing their long-term financial security. It will require the efforts of multiple sectors of society — borrowers, higher education, employers, and government — to make this possible.
Borrowers and their families must ensure they gather the knowledge needed to make wise decisions about taking on debt. This includes researching the salary projections for a given degree to help decide how much debt is feasible. Borrowers must also be clear about their various loan options, the obligations of each, and the relevant repayment rules.
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Colleges and universities should provide financial education and counseling to students. A great resource is The Council on Graduate Schools (CGS), which has compiled, with TIAA’s support, best practices in financial literacy programs in higher education. CGS has also developed GradSense, a tool for students considering getting a graduate degree that enables students to see the median debt levels for those pursuing that degree and the median salary levels for their desired career. These tools help students to better understand the impact of their chosen degree on their future earnings.
Colleges and universities must also focus on the issue of degree completion, which is a key factor in how student loan debt impacts borrowers’ financial lives. Many students who fail to graduate are unable to pay off their loans, even small ones, and end up worse off financially than when they first enrolled. Their default rate is almost 25%, compared with 9% for students who complete their degrees.
Employers can make financial advice or counseling/coaching available to their employees, directly or through their retirement plan providers. Advice and coaching are key to helping people navigate the competing demands of saving for retirement while paying down student loan debt. Some employers have also implemented a creative approach to helping employees meet these two critically important financial goals. They contribute “matching funds” to the retirement accounts of employees who are paying off student loans. Others offer employees guaranteed retirement contributions with limited or no match requirements, allowing their retirement savings to grow even if an employee isn’t able to contribute while they’re paying off their student loan debt.
Policy makers can enact laws and regulations that encourage people to save for retirement even as they pay down their student debt. Several innovative solutions merit consideration, such as approaches that simplify loan programs and leverage income-based repayment options. In the case of the employer “matching funds” programs, the IRS has already granted provisional approval for such arrangements as it studies the issue more closely, and a bipartisan bill sponsored by Sens. Rob Portman (R-Ohio) and Ben Cardin (D-Maryland) would codify the provision in the law.
An equally important task for policy makers is to address the issue of Americans’ low financial literacy levels, which hinder people’s ability to effectively manage their financial lives. We know that high financial literacy levels are linked to the kinds of behaviors that increase financial well-being, like saving for retirement, having an emergency fund, and tracking spending. Yet financial literacy skills have declined since the Great Recession, and the drop is particularly sharp for Americans aged 18 to 34, according to a recently released study from the FINRA Investor Education Foundation.
Today, there are just 20 states that require high-school students to learn financial literacy skills. More schools should offer such classes and legislation recently passed or pending in several states offers constructive steps forward.
It will take the combined efforts of many, but we can help people of all ages successfully navigate the challenge of managing and paying off student loans while also saving for retirement. It is indeed a balancing act, but the result — preparing for a financially secure retirement — is also a critically important task. Americans already face plenty of challenges in achieving this goal. We can’t allow student debt to become another obstacle.
Roger W. Ferguson, Jr., is the chief executive officer of TIAA, a leading provider of financial services in the academic, research, medical, cultural and government fields.