Conventional wisdom around student loans as impacting predominantly younger generations is accurate in the extent of the loans but not in other aspects. In fact, student loan debt among retirees is numerically lower, but the debt that is held has an increasing delinquency rate. Federal policies require that retirement benefits, like Social Security, can be withheld to pay delinquent loans.
In an effort to build benefits packages that attract workers, many employers and other benefit sponsors have been implementing student loan payments and contributions. This measure was often seen as part of professions requiring advanced degrees like law and health care. But a new study shows that student loans impact retirement income long after employees have graduated.
The researchers at Boston College’s Center for Retirement Research, a think tank that studies the economics and behavioral finance involved in retirement savings, released a new study on how unpaid student loans and federal social security policy interact.[1] Their findings are vital to anyone interested in the outcomes of employee retirement readiness. One key aspect may be the depth of the demographic sector that student loans impact when it comes to retirement savings.
Often, we’ve thought of student loans as competing for an employee’s retirement savings on a budget sheet aspect. When we think of this, it’s usually considering how student loans impact investors at the beginning of their retirement planning. “College graduates without student loans are predicted to have double the amount saved for retirement at age 30 than those who have any amount of loans. This holds even when the amount of debt is removed; it’s the presence of any student loan debt that can impact readiness.”[2] This new study challenges that focus. As the authors summarized: “student loans are not a phenomenon limited to the young. An increasing number of older people are also carrying a substantial debt burden. This burden could ultimately reduce the Social Security benefits of those who default. It is a problem that needs to be monitored.”
The Social security benefit at issue is the Impact is on the Old-Age, Survivors, and Disability Insurance ( OASDI ) program. In other words, it’s the basic social security benefits we all think of. “Almost all U.S. workers are required to contribute part of their paychecks to the Old Age, Survivors, and Disability Insurance (OASDI) program, which most of us know as Social Security. This pension program is an important source of income for many retirees. According to the most recent statistics, 79% of individuals received at least 50% of their retirement income from Social Security. About 27% of recipients get 90% of their income from this source.”[3] In 2019, 64 million people received benefits from it for a total of $1.05 trillion for the year.
Conventional wisdom around student loans as impacting predominantly younger generations is accurate in the extent of the loans but not in other aspects. In fact, student loan debt among retirees is numerically lower, but the debt that is held has an increasing delinquency rate. Federal policies require that retirement benefits, like Social Security, can be withheld to pay delinquent loans. “Technically, benefit offsets occur after a student loan has been delinquent for 425 days and the loan holder fails to restart repayment after being notified by the Department of Education.”[4] Those with delinquencies can expect to have about $2500 reduced annually from their benefits. This may seem like a trivial amount, but as some retirees are caught handling inflation in household basics, like eggs, it can have a big impact on their budgets. And it’s also important as generations that have more student debt, like GenX and Millennials, move towards retirement. The study finds that current and future retirees with delinquent debt could face a 4-6 percent drop in retirement income due to withheld benefits.
The study also highlights another important aspect of this delinquent debt: racial disparity. “Black households are more likely to hold student debt and to have delinquent loans.”[5] This can have an impact on beneficiaries. The study’s authors also note that the Biden administration’s plan to pay a portion of student loan debt could reduce not only the debt held by retirees but also reduce the likelihood of delinquency. Reduced delinquency can, ergo, increase the amount of benefits paid to those retirees.
This new research may be encouraging to plan sponsors thinking of adding student loan repayment to their benefits line up.
[1] https://crr.bc.edu/briefs/how-do-unpaid-student-loans-impact-social-security-benefits
[2] https://www.bcgbenefits.com/blog/student-loan
[3] https://www.investopedia.com/ask/answers/020315/there-any-way-opt-out-paying-social-security.asp
[5] https://crr.bc.edu/briefs/how-do-unpaid-student-loans-impact-social-security-benefits
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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