Student loan debt isn’t stopping younger workers from participating in employer-sponsored retirement plans, but they’re likely to be socking a lot less away in their 401(k) plans than those who didn’t borrow for college.
That’s according to a first-of-its-kind study by researchers at the Center for Retirement Research at Boston College.
The study found that by age 30, college graduates without student loan debt had saved about twice as much for retirement — $18,200, on average — as graduates who were working on paying down student loans.
That may not sound like much. But by the time a 30-year-old reaches retirement at age 70, $9,000 invested at a 7 percent return for 40 years would have grown to more than $130,000.
Also, some student loan borrowers may not be kicking enough in to their 401(k) to receive the full employer match, “leaving money on the table,” study authors Matthew Rutledge, Geoffrey Sanzenbacher and Francis Vitagliano point out.
But thanks to the earnings boost granted by a degree, graduates were able to put away considerably more than non-graduates, even if they were also paying down student loans.
Among graduates, having student loan debt seems to have no discernible affect on 401(k) participation rates. About 60 percent of graduates were taking advantage of employer retirement plans, regardless of how much debt they had, the study found.
Paradoxically, the more student loan debt non-graduates had, the more likely they were to be participating in a 401(k). But the study’s authors cautioned that the difference was “not statistically significant.”
Keeping retirement plans on track
To attract and retain employees in an increasingly competitive market for talent, a growing number of companies are providing student loan repayment assistance as an employee benefit.
A poll of young workers fielded last year by American Student Assistance found that getting help repaying student loans is seen as a more valuable perk than employee benefits like health flexible savings accounts, financial planning assistance, and commuter benefits.
Health insurance and 401(k) matching ranked as the most desirable benefit, but student loan repayment assistance can help recent graduates take advantage of their employer match.
That’s one reason Fidelity Investments is helping companies provide a Student Debt Employer Contribution benefit. Companies can partner with Fidelity to make after-tax contributions on their employees’ outstanding student loans, allowing them to focus on other priorities, like retirement.
In announcing an expansion of the program to include access to student loan refinancing through the Credible.com marketplace, Fidelity said participating companies include Hewlett Packard Enterprise, Ariel Corp., The Options Clearing Corp., New York Air Brake, and Millennium Trust.
Refinancing can magnify benefits
Employees working for companies that provide student loan repayment assistance as a benefit may be able to get even more out of that perk by refinancing their student loans at lower interest rates, freeing up more of their income to save for retirement.
There are two different approaches to refinancing student loans to save more for retirement:
- Lower your monthly payment. Borrowers can lower their monthly student loan payments by refinancing into loans with lower interest rates and longer repayment terms. So if you’re not able to take advantage of an employer match on your 401(k), lowering your monthly payment could help you do that.
- Borrowers who use Credible to refinance into loans with longer repayment terms achieve rate reductions averaging 1.36 percentage points, while lowering their student loan payments by $218 a month on average. The tradeoff of to that approach is that the total cost of repaying $49,000 in debt goes up by $5,051, on average.
- Accelerate your loan payoff. If you’re already able to take advantage of an employer 401(k) match, refinancing into a loan with a shorter repayment term can allow you to pay your student loans off faster.
- Lenders competing through the Credible marketplace offer loan terms as short as five years. Another advantage of this strategy is that the shorter the loan term, the lower the interest rate offered by most lenders, and the greater the overall savings.
- Borrowers who chose a loan with a shorter repayment term in order to get the lowest interest rate and maximize overall savings reduced their interest rate by 1.71 percentage points and will pay $18,668 less over the life of their new loan, on average. In order to do that, they need to increase their monthly payment by an average of $151.