Will Student Debt Crush Recent Grads’ Retirement?

If today's working-age households had the same level of student debt as those recently leaving college, what kind of effect would that have on their retirement?

New research from the Center for Retirement Research at Boston College aims to assess the impact of growing student debt on retirement security.

"Student loan debt has been growing at a rapid clip over the past decade, prompting widespread concerns about its impact on the financial futures of young Americans," write authors Alicia H. Munnell, Wenliang Hou and Anthony Webb in a report titled "Will The Explosion Of Student Debt Widen The Retirement Security Gap?"

According to data from the Federal Reserve Bank of New York, student loan debt was $1.2 trillion in 2015 – compared with just $0.2 trillion in 2003. This data shows that student loan debt now accounts for more than 30% of total household non-mortgage debt, having surpassed credit card debt in 2011.

The average student debt level for recent college students in 2013 was $31,000, according to the Survey of Consumer Finances (SCF).

"The question is whether starting out $31,000 in the hole could have a big impact on households' retirement preparedness," the report states.

What the report finds is that, yes, it does have an impact.

"This impact occurs through two channels: directly, by reducing saving in retirement plans; and indirectly, by reducing the rate of home ownership and home values," the trio write.

The report finds that households with student debt are 6.7% less likely to own a home and that the homes they do own will have a 5.4% lower value.

"With student debt and particularly delinquent student debt, it can be harder to get a mortgage," the report states. "Thus, in addition to getting a late start on saving in a 401(k) plan, those with student debt may also delay buying a house, a potential source of income in retirement."

To then assess the impact of growing student debt on the retirement security of today's working-age households, the report uses the National Retirement Risk Index (NRRI). The NRRI measures the percentage of working-age households that are at risk of being unable to maintain their pre-retirement standard of living in retirement.

As of 2013, the NRRI showed that, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), 51.6% of households were at risk of being unable to maintain their pre-retirement levels of consumption once they stopped working.

The NRRI has increased over time due to longer life expectancies, reduced Social Security replacement rates, and very low interest rates, the report notes.

How will this percentage be affected by the growth in student loans? The report gives the households in the NRRI the same student loans when they were in their 20s as recent college students.

The report uses the 2013 SCF data for those ages 21 to 29 as an approximation for recent college students. Among this age group, 55% of households had student debt, with an average amount of $31,000.

If today's working-age households had this same level of student debt, the report finds that an additional 4.6% of households would be at risk of having inadequate income in retirement.

"This change represents a substantial increase in the already alarming rate of households at risk – from 51.6% to 56.2%," the report concludes.

The report then asks, "Is 4.6 percentage points a big increase?"

To put this number into context, the report compares it to a very dramatic policy change – a 19.6% across-the-board benefit cut in Social Security (exempting current retirees) to eliminate the program's long-term financing shortfall. The report says that such a cut would raise the NRRI by 10.7 percentage points.

"So, extrapolating the effects of the growth in student debt into the future has an impact that is roughly half as large as a huge and unprecedented cut in the nation's main source of retirement income," the report says.

The report suggests that college costs should be included in broader policy discussions over how to improve lifelong financial security.

"The bottom line is that student loans definitely have a meaningful adverse effect on retirement security," the report states.

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