Debt’s a Killer

Earlier this week, I shared an article about how parents can help secure their retirement by introducing children as early as possible to what it means to be fiscally responsible. However, even the most fiscally responsible child may not be able to escape from student loans.

As the tuition for college continues to rise, more and more students are taking on debt to finance their education. Total student loan debt has risen to nearly $1.6 trillion from $490 billion a little over a decade ago!

In a recent study by Boston College’s Center for Retirement Research, researchers examined the effect this is having on younger generations’ ability to save for retirement. You can read their brief below. Tellingly, they found that while having a student loan does not preclude a young adult from actually starting to save for retirement, debt’s impact is felt on his or her amount of savings. The study found that by age 30, college graduates not saddled with a student loan to pay off have twice as much saved for retirement than those who were.

Logically this make sense - having to pay back a loan means less of your income available for other things, such as contributing to a retirement account. In the long run, that will have a huge impact on future retirement security, despite encouraging news about participation.

Does that mean you should skip college entirely to avoid the debt burden? Doing so could put you in an even worse financial position. Remember, despite the huge savings gap that exists between non-borrowers and borrowers by age 30, workers with college degrees still have higher incomes and higher earning potential the rest of their lives compared to those without.

So what’s a young adult with a student loan to do? As hard as it can be on entry-level salaries, it’s important to set at least a little aside for retirement while still meeting your student loan obligations. Even a small amount of retirement savings helps, otherwise you miss out on the power of compound interest and tax deferred returns by neglecting your 401(k), and it’s harder to make up years of lost savings.

So if your employer has a 401(k) match program, contribute at least the minimum amount to get the full match in your 401(k) (essentially doubling your total savings!), and make it automatic so you don’t miss the money. If you don’t have a 401(k) plan through your employer, you should sign up for a traditional IRA or Roth IRA using an online brokerage or investment firm, and commit to saving consistently (again automation is your friend here).

And finally, regardless of your savings plan, some of life’s biggest essential expenses are housing and transportation, so keep those in check from the get go. Living within your means frees up cash for your future retirement security.


The share of students borrowing money to pay for college increases year after year, and they’re borrowing more every year.  Total student debt, adjusted for inflation, has tripled in just over a decade.

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The loan payments, which can be a few hundred dollars a month, take a big bite out of young adults’ still-low levels of disposable income. The debt makes them more prone to bankruptcy and lower homeownership rates.

A key question is whether this pressing financial obligation might affect their preparation for a retirement that is several decades away.  Here’s what researchers Matt Rutledge, Geoff Sanzenbacher, and Francis Vitagliano of the Center for Retirement Research learned about student debt:

  • By age 30, the college graduates who are loan-free have saved two times more in their retirement plans than the graduates who are paying off debt. (Perhaps surprisingly, the presence of student loans do not seem to affect the amount saved by students who didn’t graduate, though they do have substantially less in their 401(k)s than the graduates.)

  • The amount owed by college graduates with loans does not matter. The mere existence of the debt is enough to constrain saving.

  • College debt has little influence on a young adult’s initial decision: whether to sign up for the employer’s 401(k) plan. Plan participation is the same for graduates, regardless of whether or not they have loans. Participation is also roughly the same for non-graduates with and without loans.

This study gives a mixed picture of college debt’s impact. But the young adults who do fall behind on saving will pay for it decades from now, when they’re ready to retire.

The problem is also likely to grow. Most of the young adults in this study borrowed money before the big surge in debt in recent years.