Gen-Y is by far the best-educated cohort of the U.S. workforce, but many Millennials had to borrow a lot of money to pay for college. In fact, student debt has nearly tripled in inflation-adjusted terms between 2005 and 2017, and both the share of graduates with loans and their average outstanding loan balances have jumped over the past few decades. Carrying such debt loads can be worth it if the college degree translates into greater earnings power. For many young adults, though, their student loans are hindering their ability to prepare for retirement. For example, a report from Aon Hewitt found that 28 percent of surveyed U.S. adults said that they currently have an outstanding student loan.
Respondents with such liabilities were found to be participating in employer-sponsored retirement plans at a lower rate than those without education-related debt, and therefore potentially missing out on full company matching contributions. Similarly, a new study by Boston College’s Center for Retirement Research found that university graduates with student loan obligations have accumulated only about half as much in 401(k) assets by age 30 as those without education-related debt. Even the retirement savings of graduates with relatively small loan balances still significantly lagged non-debtors, which the researchers said could mean that “young graduates consider the simple existence of a student loan, rather than its size, to be a constraint on their 401(k) saving.” What is worse is that student loan obligations can not only hinder young Americans’ ability to save for retirement but also reduce the benefits they receive from the government in old age.
Specifically, current law allows earned Social Security benefits to be garnished by the government as a way to help with student loan and other federal debt collections. In fact, the number of Americans who have had their benefits garnished by the government has surged from 36,000 in 2002 to 173,000 in 2015, according to the U.S. Government Accountability Office. Congress has explored ways to provide protections for senior debtors, such as limiting the amount of earned benefits that can be garnished by the government. However, people should still strive to pay off their student loans and other financial liabilities as soon as possible so that the funds going toward these obligations can instead start to be put to better use in a tax-advantaged retirement savings vehicle. Moreover, consulting with a professional financial advisor can help such individuals come up with a plan for paying down their debt quickly and maximizing the growth of their savings.
Sources: Boston College (CRR), Aon Hewitt, U.S. GAOPost author: Charles Couch