EBRI Issue Brief

Student Loans and Retirement Preparedness

Feb 8, 2024 18  pages


Student loan debt can be a burden on individuals’ finances and can impact the level of contributions a 401(k) participant may make. Having a better understanding of this impact and how participants respond to a change in this debt payment status can provide better information for plan sponsors on benefit decisions. Consequently, this study aims to provide better information on how student loan debt payments affect the 401(k) contributions of those who are contributing and what participants do with their contributions when their student loan payment status changes (payments end or start) by looking directly at 401(k) plan recordkeeper data on balances and contributions of active participants linked with banking data from these same participants to see if they are making student loan payments.

  • One-fifth of the study sample’s participants had student loan payments in at least one of the three years of this study, while 12.1 percent had them in all three years. However, the likelihood of these participants having student loan payments decreased as the age of the participant increased. The likelihood also decreased as tenure decreased, while it increased with income.
  • Among those with incomes less than $55,000, the average employee contribution rate of those making a student loan payment over the three-year period was 5.3 percent compared with 5.7 percent for those not making student loan payments. The difference was larger among those with incomes of $55,000 or more: 6.1 percent with payments vs. 7.3 percent without payments.
  • When looking at the resulting balances at the end of the study period by tenure, the average account balances at the end of the study were lower for those who made student loan debt payments than for those who did not make these payments. The differences were particularly pronounced among the participants with incomes of $55,000 or more. For example, among those with tenures of more than five years to 12 years, the average balance for those who made payments was $86,109 vs. $107,687 for those who did not make payments.
  • Of the participants who were making student loan debt payments at the beginning of the study period and had stopped by the end of the study, 31.6 percent increased their contribution rate by at least 1 percentage point after the payments had stopped. This share that increased was slightly higher for those with incomes less than $55,000, at 33.3 percent, compared with 30.5 percent for those with incomes of $55,000 or more.
  • Making student loan debt payments was found to have a statistically significant negative impact on both the average employee contribution rate and account balance at the end of the study.

The paying of student loan payments had a significant impact on the level of contributions of those contributing. However, some of the impact of the student loan payments appeared to be muted by the existence of employer contributions and default contribution rates of automatic enrollment plans, as the median employee contribution rate for all participants was near the level of the maximum amount matched and/or common default rates. Furthermore, a sizable share of participants adjusted their contributions as their student loan debt obligations outside of the plan changed. Consequently, financial wellness programs can help with contribution and debt payment decisions by considering the total finances of the participant. The change in payment status can also be an important touchpoint in helping to improve the financial wellbeing of participants, as many appear to be making important financial decisions at this time, and better information could improve outcomes.