Student Loan Debt Weighs Heavily on Retirement Savings

A mind is a terrible thing to waste, but college is awfully expensive.

Depending on where someone goes to school, they can be left with a lot of debt — an albatross that can hang around their neck for decades. Among 401(k) plan participants in their 40s, those with student loan debt had median retirement account balances roughly 45% lower than those without, according to a new report from the Employee Benefit Research Institute.

The best option is to figure out scholarships, financial aid, debt timelines and what school makes financial sense before going to college. But that’s not reality for many clients, leaving advisors to help fit student debt into a financial plan that balances both loans and savings. “The biggest mistake I see is treating student loans as an all-or-nothing problem,” said Corinna Rose, a CFP with Bell Investment Advisors. “Many borrowers think they need to eliminate every dollar of debt before they can start investing.”

Don’t Know Much About History

The average student loan debt is more than $43,000, according to the Education Data Initiative. But Ryan Galiotto, founder of Etch Financial, said his clients with student debt owe more than twice that on average. Part of that is a result of the federal Grad PLUS Loan program, which began in 2006 and allowed graduate and professional students to borrow up to the full cost of attendance, minus other financial aid. The program was eliminated for new borrowers in July. “For a long time, it has been very easy to take out student loans,” Galiotto said. “The borrowing system had been broken for many years.”

When clients come to him with significant student debt disrupting their retirement savings, Galiotto first looks for potential relief, including Public Service Loan Forgiveness for government and nonprofit employees.

There may be another option, though:

• Workers could benefit from programs for employers to make 401(k) matching contributions based on employees’ student loan payments, even if they aren’t contributing to their retirement plans. 
• Universal adoption of that could generate up to $20.2 billion in annual 401(k) matching contributions, depending on the maximum employer match, per EBRI’s estimates.

Freshman Class. When clients and their children are considering colleges, Galiotto said it’s important not to focus solely on sticker price. A private school may offer more financial aid than a cheaper public university, for example. He also encourages parents to negotiate for more aid when multiple schools are competing for their children. “You can pit offers against each other to help your kids secure a better deal,” he said.