Most millennials are justifiably skeptical about the future of social security. The defined pension through most employers is all but extinct. For most households today, retirement planning is all about the 401k and saving for the future. Unfortunately, student loan debt makes putting money away for retirement a difficult task.
A recent study by the Center for Retirement Research at Boston College examined the relationship between student debt and retirement. The researchers noted that in 2015 student debt levels reached $1.2 trillion. As recent as 2003, this number was $0.2 trillion. The team at Boston College wanted to find out how this rapid growth in student debt affected the ability of borrowers to retire.
In order to study an individual’s ability to retire, the researchers calculated the National Retirement Risk Index (NRRI). The NRRI defines a retirement as being “at risk” if a household is not able to maintain their current standard of living when they reach retirement age.
Not surprisingly, the research team found that college debt put retirements at risk. In households without student debt, the percentage of retirements at risk is an already disturbing 49.2%. Things look even more bleak for households with student debt, as 60.1% of these households have their retirement at risk.
The interesting result is seen when the researchers take a closer look at the households with student debt. In student debt homes with a degree, 52.9% of retirements are at risk. In student debt homes without a degree, the number jumps to 67.1%.
How bad are things?
One problem with the researchers approach was that they looked at a households ability to maintain their current standard of living. For many, this means living very frugally and trying to get by from paycheck to paycheck. The idea that many of these homes will be taking a step backwards in retirement is a truly scary proposition.
Part of the reason student debt is such a major issue for retirement is that it turns compounding interest against borrowers. A 25-year-old without student debt can put money in a 401k to save for retirement. As the money sits in the account it earns interest. Then the interest earns interest. As the years pass, the balance grows more and more. A little bit of money put away at 25 grows into a large sum by 65, and suddenly retirement is a possibility.
Student debt shows the ugly side of these interest rates. For borrowers who are struggling to keep up with their student loans, such as those who never graduated, things get worse because of interest. Instead of growing a retirement, the student loan balance grows. In homes where borrowers cannot even keep up with the interest on their student loans, compounding interest is a very ugly thing.
Finding a way to retire
This site has already taken a close look at finding ways to save for retirement while managing student debt. The Boston College study confirms what most borrowers already know. It isn’t easy.
As the cost of college continues to skyrocket, the long-term retirement prospects for new borrowers will continue to dim.