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Does Student Debt Affect Retirement Saving?

We hear a lot about the crushing load of student debt many Millennials carry these days – but is it having an impact on retirement plan participation?

Not much, according to “How Does Student Debt Affect Early-Career Retirement Saving?” by reseachers Matthew S. Rutledge, Geoffrey T. Sanzenbacher, and Francis M. Vitagliano at the Center for Retirement Research at Boston College. The paper finds that the estimated relationship between student debt and participating in a retirement plan – whether or not their employer offers one – is “small and statistically insignificant,” leaving the authors to conclude that any large negative correlation could be ruled out. Moreover, and somewhat contrary to expectations, individuals with a large loan balance who were offered a plan are more likely to accept it, though the authors note that the estimated relationship is small.

The authors note that in 1993, 47% of graduates had student loans, but the debt burden was typically low – borrowers owed around $10,000 on average (in 2013 dollars). By contrast, today 70% of graduates have loans and the average debt burden has tripled to $30,000.

The paper cites some evidence indicates that bachelor’s degree-holders who have student loans have lower retirement assets at age 30, though again they find that those estimates are statistically insignificant, with retirement asset levels are “unrelated to the size of their student loan balances.”

Source ‘Spots’

The researchers note that while “nearly all of the existing studies” they reviewed rely on data from the Survey of Consumer Finances (SCF), a nationally representative cross-sectional dataset, the SCF includes only a small number of young adults, which they say may lead to “noisy” results. Instead, they drew on information from the National Longitudinal Survey of Youth 1997 Cohort (NLSY97), which they say samples a larger cohort of recent college graduates than would be available in standard surveys of household finances, and includes rich information on students’ family background, college quality and intellectual ability.

Not that the debt levels aren’t having an impact on finances. While the researchers found a lack of a relationship between student loans and retirement plan savings, they concluded that it suggested that the detrimental effect of student debt manifests itself either through reduced consumption or other reductions in net worth, such as credit card debt. The paper notes that it bears keeping an eye on future cohorts “to determine whether a stronger relationship between student debt and retirement savings will emerge in the future.”

However, while those young workers’ balance sheets are clearly hurt by student debt, the researchers noted that the preliminary results indicate that they do not substantially reduce retirement saving to compensate. Good news for their long-term prospects, anyway.