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Is Student Loan Debt a Barrier to Saving for Retirement?

Employers can help their employees overcome this challenge and thrive financially
Key Insights

  • Saving for retirement is a financial goal that has steadily grown in importance for American families over the past 30 years, yet within the same span of time, student debt has emerged as a significant competing priority.
  • Millennials are most burdened by student loan debt; however, Generation Xers with student loan debt are less likely than millennials to be saving for retirement.
  • Workers would benefit from financial wellness programs that help them prioritize and manage day‑to‑day living expenses and debt while staying focused on shortand long‑term savings goals.

Blue Line

$1.5 trillion

Amount of money Americans owe in government-issued student loan debt.

America is simultaneously facing retirement savings and a student loan debt crisis. The Employee Benefit Research Institute (EBRI) estimates that, collectively, Americans face a $3.83 trillion retirement savings shortfall.1 At the same time, Americans owe in excess of $1.5 trillion in government‑issued student loan debt, of which 24% was in either forbearance or default.2

These are sobering statistics.

There’s evidence of unhealthy financial behaviors by savers and non‑savers alike. Our data suggest that people do not make rational decisions relative to the size of their debts or the trade‑offs necessary to reach financial goals.

The result is that the assets and liabilities workers hold will have downstream effects on their retirement readiness as they balance day‑to‑day spending, debt management, and savings goals.

Retirement savings are of increasing importance to American families, and 401(k) plans are rising as the primary savings vehicle for most workers. According to the Survey of Consumer Finances, roughly 19% of respondents cited saving for retirement as a financial goal in 1989. By 2016, that figure had risen to 30%. In contrast, saving for education was cited by only 9% of respondents in 1989 and fell to 7% in 2016.3 Yet, during this same period, the cost of a four‑year education at a public university has increased approximately threefold and the cost of the same four‑year education at a private university has increased twofold.4 Something has to give.

Comparing Debts of Millennials and Gen Xers

(Fig. 1) Fewer millennials own homes and have more education debt than Gen X atthe same point in their lives.

Real Liabilities by Year, Generation, and Incidence in 2016 Dollars

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.
1 Christopher Kurz, Geng Li, and Daniel Vine, “Are Millennials Different?”
Note. The table reports various components of household liabilities for the youngest working cohort and the population in 2004 and 2017. Median values are conditional on having a positive balance.

Our research and survey revealed:

  1. Age matters, but saving habits change over time.

  2. Debt is holding back employees from saving more for retirement.

  3. More specifically, student debt is one of many barriers to retirement savings for both plan participants and nonparticipants.

But all is not lost. Plan sponsors have an opportunity to better align their savings and benefit programs to the financial needs of their employees. The hope is that employees can take advantage of resources that can help them better organize their financial priorities in order to achieve greater financial well‑being and retirement readiness.

To better understand this issue, we’ve reviewed the relevant academic and policy research, leveraged findings from T. Rowe Price’s annual Retirement Savings and Spending Study, analyzed the 2.2 million 401(k) plan accounts that T. Rowe Price provides recordkeeping services for, and conducted a survey of over 2,400 of the employees of the companies T. Rowe Price serves.

Age Matters, but Savings Habits Change Over Time

Millennials are indeed different. According to a recent Federal Reserve paper entitled “Are Millennials Different?” millennials have less debt than Generation X at the same point in their lives. But that fact belies a more troubling reality. When comparing the debts and assets of both millennials and Gen Xers at the same point in their lives (see Fig. 1), Gen Xers were far more likely to own homes than their millennial counterparts. In addition, the amount of debt Gen Xers took on to do so was significantly lower. There are other differences too. Millennials were almost twice as likely to have taken on student loan debt compared with Gen Xers. Further, the amount of debt is significantly higher than the previous generation.

Millennials Have More Retirement Assets but Lower Net Worth

(Fig. 2) A look at median net worth and retirement balances in 2016 dollars.

Chart: Percentage in Retirement Assets - Millennials, GenX

Source: 2016 Survey of Consumer Finances.
Note: Median values are conditional on having a positive balance.

Not all the data are bad, but there is a caveat. Specifically, millennials have greater levels of retirement savings compared with Gen Xers (Fig. 2). However, the change in retirement savings may be attributed to the passage of the Pension Protection Act of 2006 and the widespread adoption of auto‑enrollment by employers. This resulted in workers starting to save earlier in their careers than they otherwise would under an opt‑in regime.

Still, even with this change, the median net worth of millennials is lower than that of Gen Xers due to the lack of or delay in homeownership—a major source of wealth creation. Moreover, the relative impact of homeownership is greater compared with retirement savings early in one’s career due to the use of debt to buy an asset.

Lastly, student loan and other forms of debt do impact one’s ability to save for retirement.

While household balance sheets have been changing, there are common underlying beliefs that remain constant, are resistant to change, and may be exacerbating the savings gap. For example, most people believe that debt related to education is “good” debt. Among those we surveyed, 64% “strongly agreed” or “agreed” that “Investing in education is a good investment in the future, even if it means taking on educational loans to pay for it.” That view did not materially change whether the person was participating in their employer’s plan, nor did it differ by how much was borrowed.

White Paper

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White Paper: Is Student Loan Debt a Barrier to Saving for Retirement

Our research demonstrates that people often need assistance properly prioritizing financial goals and developing healthy financial behaviors. That said, employers are not bystanders to the financial challenges their employees face.

1 VanDerhei, Jack, Ph.D., “Retirement Savings Shortfalls: Evidence From EBRI’s 2019 Retirement Security Projection Model®,” ebri.org Issue Brief,
March 7, 2019, No. 475, p.11.
2 T. Rowe Price analysis of Federal Student Loan Portfolio (inclusive of Direct, Federal Family Education Loans, and Perkins Loans).
3 2016 Survey of Consumer Finances, https://www.federalreserve.gov/econres/scfindex.htm, table 3.
4 Trends in College Pricing 2019, College Board, p.13.

Important Information

This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.

The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

© 2020 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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