Student debt thwarts Americans saving for retirement

For many Americans, student loans are not just a debt from the past. They're making it impossible to save for the future.

In particular, new research shows that student debt has become a major obstacle to retirement savings. According to a study by the Achieve Center for Consumer Insights, 30% of Americans with student loans have not saved for retirement because of their debt.

"The sad takeaway is that it wasn't all that surprising," said Andrew Housser, co-founder of Achieve. "We've seen the stress that debt in general has put on consumers for 20 years, and the ballooning of student loan debt in particular."

This finding dovetails with other research. A recent Fidelity study found that 84% of borrowers said their student loans impacted their ability to save for retirement. And a report by Goldman Sachs found that "financial vortexes" — stressors including student loans, credit card debt and other expenses — can reduce American retirement savings by up to 37%.

Many financial advisors are all too familiar with this drag on their clients' nest eggs.

"This is increasingly common," said Melissa Cox, a certified financial planner at Fetterman Investments in Dallas, Texas. "We are in a period where families haven't been able to save a lot for … retirement, because they are still paying their own student loans."

That debt is also standing in the way of other savings goals. The Achieve study, which surveyed 1,000 U.S. adults, found that 26% of borrowers had not paid off other debts, 23% were unable to buy a house and 17% couldn't buy or lease a car — all "as a direct result of their student loan debt."

"Any sort of life goal that has a financial component is being impacted by student loan debt," Housser said.

Read more: 4 reminders for clients as student loan repayment looms

Until recently, borrowers benefited from a COVID-era pause on federal student loan payments. But that pause expired in August, and the first new payments will be due next month.

As those bills loom, many borrowers are expecting the worst. Almost half of Achieve's respondents — 45% — said they feel stressed about restarting their loan payments, and 28% said they'll have to take out additional debt to make ends meet.

"The forbearance that happened during the pandemic was a welcome relief," Housser said. "But our position all along was that that was sort of a Band-Aid, which was not solving the underlying problem."

That underlying problem, Housser said, is that the cost of higher education has skyrocketed. For the 2023-2024 school year, the average tuition at a private college is $39,723 — up 4% from last year, according to the U.S. News & World Report.

These costs, and the resulting debt, have grown so large that many Americans are beginning to doubt whether college is worth the price. A recent Gallup poll found that just 36% of Americans had confidence in the value of higher education, down from 57% in 2015.

There's not much the average borrower can do about the cost of education. But there are things they can do to manage both their debt and their retirement savings — and financial advisors can help them.

Eric Roberge, founder of the RIA Beyond Your Hammock in Boston, says he advises his clients with student loans to take advantage of the provisions in Secure 2.0, the federal retirement legislation that was passed last year.

"If you currently have student loans, you can pay those down and still get a matching contribution to your retirement plan from your employer," Roberge said. "You can tell your employer you are using the money you otherwise would contribute to an employer-sponsored retirement plan like a 401(k) to pay down your loans — and your employer will still provide their normal matching contribution into your 401(k)."

Other policies could help as well, if advisors alert their clients to them. After the Supreme Court struck down President Joe Biden's student loan forgiveness program, his administration launched a number of other policies to give borrowers relief.

One is the "on-ramp," a 12-month period during which debt holders who miss payments are not considered delinquent. Another is the SAVE plan, an income-driven repayment plan that allows borrowers to pay just 5% of their income per month.

Read more: 3 strategies to help clients with student debt after the Supreme Court's decision

"Anyone who has a considerable amount of student loan debt should enroll in the new SAVE plan," said Jay Zigmont, founder of Childfree Wealth in Water Valley, Mississippi. "The combination of the lower payments and no loan growth due to interest make it a good option."

But until the underlying cause of this debt is addressed, Housser said, the national problem of student debt is not going away.

"The cost of education continues to outpace inflation by a long shot," Housser said. "The whole system is set up to break badly at some point."