Retirement Savings Take a Hit from Student Loan Debt: Study

Retirement savings are in jeopardy as Americans face a record level of student loan debt, experts told Newsweek.

Nationwide, the country is grappling with $1.6 trillion in federal student loan debt, and as Americans cripple under their monthly payments, very little is left over for retirement or down payment savings.

Making student loan debt payments was found to have a significantly negative impact on both the average 401(k) employee contribution rate and account balance, a new report from the Employee Benefit Research Institute and J.P. Morgan Asset Management found.

Those with incomes of $55,00 or lower saw an average employee contribution rate of people with student loans at 5.3 percent. That was less than those not making student loan payments, who contributed 5.7 percent.

However, looking at those with higher salaries painted a full picture of how much student debt can weigh on your ability to save for retirement. For those with incomes higher than $55,000 who made loan payments and who did not, the difference was stark at 6.1 percent and 7.3 percent.

The ending balances were also lower for those making student loan payments. For those with tenures of 5 to 12 years, the average balance for student loan carriers was $86,109 versus those without payments who had $107,687.

And once participants stopped making student loan payments, 31.6 percent had increased their contribution rate by at least one percentage point afterward.

This is no surprise to Student Loan Sherpa founder Michael Lux, who said Americans find saving for retirement to be increasingly difficult due to the shift away from pensions and to 401(k)s, to which employees have to choose to contribute.

"I often say that the student loan crisis of today will become the retirement crisis of tomorrow," Lux told Newsweek. "At a time when many borrowers are struggling to pay this month's bills, worrying about finances 30 years away isn't an option."

Millennials and Gen Z are the most likely to see the negative impacts of their student loan payments on their future retirement savings, and that might mean they'll be forced to work longer than the generations before them.

"As young adults grapple with mounting loan obligations, their capacity to invest in retirement funds dwindles, setting a worrying precedent for future financial stability," Jason Berube, the CEO and founder of Cornerstone Wealth Consulting Services, told Newsweek. "Millennials and Gen Z are poised to bear the brunt of this burden, as they face unprecedented levels of student debt and stagnant wage growth."

That, combined with the Social Security Administration's predicted insolvency in 2033, paints a bleak future for those who have just recently begun adulthood.

There are some ways student loan borrowers can still try to become prepared for retirement, though. Some income-driven repayment plans, including Biden's SAVE option, allow the money you put into a 401(k) or IRA to lower your adjusted gross income, subsequently reducing the student loan payments you'll make the next time.

"Putting money in a retirement account can mean lower student loan bills, more student loan forgiveness, and more money in retirement. For those who can afford this strategy, it is a great option," Lux said.

Student loan borrowers might also need to question the common advice that they should pay off their debts as soon as possible.

"Many want to rid themselves of student loan debt as soon as they can," Steve Azoury, the owner of Azoury Financial, told Newsweek. "However, that might not be the best choice. In reality, you should be allocating income towards both debt and savings."

Interest rates on student loans might be just 5 to 7 percent, but the tax benefits of saving money into a retirement account can outpace that at 20 to 25 percent, he added.

Michael Ryan, a financial expert who runs michaelryanmoney.com, echoed this sentiment.

"Typically, debt repayment takes precedence, but temporarily shifting focus to accelerate retirement savings can allow faster retirement fund accumulation," Ryan told Newsweek. "Only repay debts first if the interest rates are greater than your expected rate of return of your investments."