Morgan Stanley
  • Wealth Management
  • Aug 25, 2021

What Does Having Student Loan Debt Do to Your Retirement Savings?

Having student loan debt can make it difficult to put as much money towards your retirement savings as you might like—but your debt doesn’t need to hold you back from investing in your future.

Here’s a look at the impact that having student loan debt has on the more than one trillion people who have some form of student loan debt and some tips you can use to balance paying off loans and saving for retirement.

How much are people actually saving?

29% of people with student loan debt are delaying saving for retirement because of it1. Further, an analysis by the Center for Retirement Research at Boston College (CRR) indicates just how much of an impact student loan debt can have on a person's financial life: Graduates without student loan debt have about $18,000 in retirement savings by the time they're 30 years old, while graduates with debt save about $9,000 for retirement2. Despite that student loan debt can make it more difficult to save, CRR's research shows that a college degree positively impacts your financial life overall. For example, people without a college degree save about $5,400 for retirement by the time they're age 30, compared to the $18,000 college graduates save.

CRR's research also reveals that it is the presence of the debt—not the amount of it—that plays the greatest role in a person's retirement savings. Use this finding to shift your perspective and remember that you can choose not to allow your student loan debt to compromise your ability to save for the future.

Why save for retirement when you’ve got student loan debt?

Saving for retirement is a long-term goal, but contributing to retirement early in your career can be as important as how much you are able to contribute, thanks to the power of compounding interest. Despite this, the CRR experts conclude that young adults may end up saving less for retirement than they could actually afford to early in their career, because of a misperception that having debt makes it impossible to do. Worse still, this failure to contribute to retirement can mean that young adults miss out on some of the other important financial benefits that may come with retirement contributions—like the ability to claim a "match" an employer may offer on retirement contributions up to a certain amount and/or the opportunity to lower taxable income.

Consider just how important saving for retirement early in your life can be3. A 25-year-old who puts $3,000 into a tax-deferred retirement account for every year for ten years and completely stops saving for retirement by age 35 could grow a $30,000 investment to more than $338,000 by age 65, assuming a 7% annual return. By contrast, a person that doesn't save for retirement until he's 35 years old and saves $3,000 a year for 30 years will retire with only $303,000 at age 65, assuming the same return. The 35-year-old will ultimately have saved three times what the 25-year-old did—but will still end up with less total retirement savings.

Simple tips to kick start retirement savings

Retirement is a major financial goal, but these small steps can help make it feasible:

  1. Calculate how much you could put toward retirement. Total all of your monthly expenses, including the monthly payments you must make to your student loans. Then, subtract that number from your total monthly income. The number you get is how much you could potentially start to put into a retirement account. While researchers at Stanford Center on Longevity suggest that putting at least 6% of your income towards retirement is a “meaningful contribution" and you'll see even more savings progress if you can contribute at least enough to qualify for any "match" your employer may offer, any amount you can afford to save is a step in the right direction.
  1. Automate your contributions. Contributions to your employer-sponsored retirement plan, like a 401(k) or 403(b), are pre-tax, and as a result may lower how much income tax you have to pay on your earnings. Plus, pre-tax contributions are made before your paycheck even hits your bank account. You won't see it come into your bank account or leave, so you won’t miss it or be tempted to spend it! As you progress in your career and earn more money or qualify for merit increases or bonuses, consider increasing your contributions by 1% or more each year to further accelerate your retirement savings.

Monitor your progress. Experts at Stanford Center on Longevity suggest that your ability to make saving (which is essentially invisible) feel as rewarding as spending is an important factor in being motivated to save for retirement. Give yourself a reason to save by setting a goal number for how much you want to contribute each year using a free retirement calculator . Once a month, chart your progress so you can see that your retirement contributions are getting you closer to your goal, little by little.

Student loan debt can feel like a financial burden, but it doesn't have to prevent you from saving your future at the same. Set a goal for how much you'd like to save for retirement each and commit to putting some amount of money from each paycheck into your retirement savings account Eventually, you'll see your savings balance grow and the amount of your student loan debt decrease. When you do, the value of saving for retirement will become more tangible and worth your effort, no matter how many decades into the future your retirement years may be.