Student debt and retirementThe recordkeeping industry faces a reckoning when it comes to student debt and retirement. The COVID-19 pandemic has shone a spotlight on the importance of workplace benefits beyond traditional healthcare and 401(k) offerings. Americans are worrying about living costs, healthcare expenses, debt and saving for goals. And they are looking to their employers and benefit providers to help them. To help employers meet participants’ needs and expectations, recordkeepers have expanded their workplace benefit programs beyond 401(k)s.

Student debt has garnered attention among recordkeepers as younger generations enter the workforce. The topic will become even more important if the Securing a Strong Retirement Act of 2020 passes. The Act will let employees contribute to student loan debt instead of 401(k) plans and qualify for their employer’s match. Further, with the passage of the recent stimulus bill, Congress extended certain CARES Act student loan provisions through 2025. Plan sponsors will be able to continue making up to $5,250 in tax-free contributions per employee annually toward certain education expenses, like student loan assistance, without raising an employee’s gross taxable income.

The relationship between the retirement industry and student loan assistance will only continue to grow. Recordkeepers should consider pairing with third-party firms to offer refinancing and educational resources. This will help participants manage student debt and retirement savings in a way that will ease stress and promote overall financial wellness.

The many costs of education

Grim statistics show that rising college costs have been a pain point for years:

  • In the past two decades, tuition and fees rose 212% at public universities and 144% at private universities.
  • Collectively, Americans owe about $1.71 trillion in student debt, which is considerably less—about $740 million less—than the nation’s credit card debt.
  • On average, each borrower’s student debt is nearly $33,000, totaling about $393 in monthly payments.

The government has responded to this issue by introducing repayment plans (e.g., REPAYE, PAYE) that help borrowers afford their monthly payments. But these programs also extend payback periods. A recent study found that over the past 18 years, the time it takes to pay off a federal loan has almost doubled. Half of the borrowers taking advantage of these programs have payback periods longer than 10 years—some of which extend to 25 years. Meaning that many of today’s borrowers will still be making monthly payments into their 40s and 50s. This may delay individuals’ abilities to save for retirement. And cause them to miss out on years or even decades of compounding and investment returns.

Americans owe about $1.71 trillion in student debt, $740 million less than the nation’s credit card debt.

Student debt’s burden on retirement savings

Generally, individuals—even those without student debt—simply are not saving enough for retirement. About 30% of Corporate Insight’s 2018 survey respondents indicated having less than $10,000 saved for retirement. Mounting student debt worsens this lack of savings. A recent study found that individuals with bachelor’s degrees who carry student debt have saved significantly less for retirement by age 30 than those without debt. Similarly, a survey revealed that 62% of respondents with student debt postponed saving for retirement because of their debt. In a recent Fidelity survey, 69% of respondents with debt reportedly decreased or stopped contributions all together or have taken distributions from their retirement savings because of student debt.

62% of a recent survey’s respondents with student debt said they postponed saving for retirement because of their debt.

The burden of student debt spreads beyond younger generations. It also impacts parents who help their children or dependents pay for college. In fact, Americans over 60 are the fasting growing cohort with student debt. This poses problems as these individuals are closer to retirement and likely won’t be able to pay down their debts before reaching retirement. Worse yet, if a retiree defaults on these loans, their Social Security benefits could suffer a 15% loss.

Recordkeepers’ response to student debt and retirement

The retirement industry has opened its doors to helping participants balance paying down student debt while still contributing to their retirement plans. Recently, multiple major recordkeepers engaged third-party firms to offer student loan management services to participants. These programs’ offerings vary, but some standout features include refinancing services, repayment option education and scholarship search tools. Notable third-party pairings include:

  • Empower Retirement, MassMutual and Transamerica all paired with CommonBond to offer student loan repayment options.
  • Transamerica also partnered with Futurefuel.io and Tuition.io.
  • Rowe Price engaged SoFi to provide participants with student loan debt refinancing, financial counseling services, employer contribution capabilities and new educational resources. The offerings include a college payoff date calculator.
  • AIG and TIAA partnered with Savi to offer lending products and guidance tools. The tools aim to help participants understand the different ways they can manage their student loan payments, pay down their student debt and determine their eligibility for federal repayment and forgiveness programs.
  • John Hancock introduced the College Education Planning Center, which lets users set and track progress toward their goals. Participants can create and manage task lists and calendars, receive actionable advice for closing gaps and access a wide array of educational resources, tools and calculators.

By offering these programs, recordkeepers can help companies attract talent and ease stress among employees. And they can foster financial wellness and better retirement outcomes.

Student debt and retirement Empower Retirement CommonBond refinancing sitelet
Empower Retirement CommonBond Refinancing Sitelet
Kara Melber