$30,000 Student Debt Results In Loss Of $325,000 Retirement Savings

The Importance of Reducing Student Debt

$30,000 Student Debt Results In Loss Of $325,000 Retirement Savings
April 20, 2016

Student debt has reached alarming levels in the U.S. As of mid-November 2015, MarketWatch estimated the total student debt to be just under $1.32 trillion and growing at a rate of just over $2,726 per second. Various sources report that the average college graduate from the Class of 2015 was burdened with around $33,000 to $35,000 of student loan debt to repay.

Even with a great job after graduation — and that is certainly no guarantee in this market — paying off such a large debt takes time and detracts from other spending and saving needs, including retirement. Graduates are probably thinking more about homes and other savings goals, but a recent study by LIMRA shows how important it is to consider the retirement aspect.

Student Loan Debt Could Keep You from Saving for Retirement

The LIMRA Secure Retirement Institute analyzed the impact of student debt on a student's projected nest egg at retirement and found that an outstanding student loan debt of $30,000 after graduation reduces the retirement savings by $325,000. At $50,000 of debt, the reduction is almost $530,000.

Millennials have been particularly hard hit by the combination of high college costs and a deep recession with a long and slow recovery. A sizable number of millennials were either unemployed or underemployed for some time after graduation, magnifying the effect of their student loan burdens. This in turn has contributed an overall lower savings rate in general — whether it is for a down payment, retirement, or simply to maintain an emergency fund.

Younger workers understand the importance of retirement programs but are having a difficult time contributing to them. Contributions are more important than ever, as defined benefit pensions are few and far between. Only 10% of Millennials are likely to have access to a defined benefit program, thus 90% are going to have to fund their own retirement partially or fully. A lack of contributions in early years drastically reduces the compounding effect that builds a good retirement nest egg.

Millennials who are offered defined contribution plans like 401(k)s generally participate in the programs, but they save at a lower rate. Those without student loan burdens are 60% more likely to contribute to the maximum of their employer's matching benefits. It is a reasonable assumption that money that is not going toward matching benefits is being used to pay down debt as quickly as possible.

At some point, students and their parents must look at a return on investment. Would an investment of $30,000 in debt make a large enough difference in pay over the course of a lifetime to recoup $325,000 in retirement fund losses? Even without taking the time value of money into account, over a forty-year career, it would require less than $10,000 in extra annual salary throughout your career to make up the difference.

There is no obvious answer, since it depends on the career path of an individual. Degrees do not guarantee success and lack of them does not guarantee failure. However, it should make a student pause about the relative value of his or her education and the average pay in the chosen post-graduate field. Are you getting the most for your educational dollar and could you accomplish the same life goals at a less-expensive school?

During the college years, you are likely to say you are getting your money's worth. You may not think so when you are still paying off student loan debt in your thirties. LIMRA is suggesting that you take a long view with respect to educational debt and quality of life — and retirement. Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

Photo ©iStock.com/baona

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Brittany | 04.21.16 @ 19:02
I am transferring to a university come this fall and I am TERRIFIED of student debt and what it's going to end up doing to me in the long run if I am not able to get a handle on it early on.
Carla | 04.21.16 @ 19:03
I am still amazed that education expenses are so high. The harsh realization when you get the bill has to be a shocker. Any debt that high will certainly put a damper on your later years.
Kamie | 04.21.16 @ 19:03
This is something I think that needs a lot of attention. People should not be having to live pay check by pay check because of education that they got to have a better success in having a good paying career. It really does not look appealing when you worked hard, went to school, and you are at retiring age still paying off your school debt.
Kailie | 04.21.16 @ 19:04
That is a lot of money to lose out on and is def something that needs to be brought to the attention of the hundreds of thousands of college students.
Sarah | 04.21.16 @ 19:05
oh my. I never even stopped to think about all that. My college education was paid for thru scholarships (yep, plural) and grants... those loans are just insane
Kyle | 04.21.16 @ 19:06
It's crazy to think that education expenses are as high as they, especially since you're limited in what you can do if you don't have a degree under your belt.
trish | 04.21.16 @ 19:06
I was so blessed to get a lot of scholarships when I went to the University so I graduated with very little debt. But I know some that it took many years to pay off, and they definitely suffered because of it.
Nancy | 04.21.16 @ 19:06
These numbers are astounding and very disheartening. You would have to be guaranteed a well-paying job just to even consider student loans at this point.
$commenter.renderDisplayableName() | 05.06.21 @ 07:18