Student loan debt negatively impacts 401(k) contributions, study reveals

Making payments of student loan debts has a statistically negative impact on 401(k) contributions and balances, according to a recent study by the Employee Benefit Research Institute and J.P. Morgan Asset Management.

The research considered the behavior of those making student loan payments and those who are not, and how contributions to employer-offered retirement savings programs when the loan status changes (e.g. starts or ends).

The three year study reveals that one fifth of participants had student loan payments in at least one of the years, while 12% had in all three. Those who were younger and/or with higher incomes were more likely to be making loan payments than those with a longer tenure.

The 401(k) contribution rates of those included in the study were:

• 5.3% for those earning less than $55,000 and making student loan payments
• 5.7% for those earning less than $55,000 but not making student loan payments
• 6.1% for those earning more than $55,000 and making student loan payments
• 7.3% for those earning more than $55,000 and not making student loan payments

Looking at end balances of participants over the study period, those who made student loan payments and with a tenure of 5-12 years had accrued an average $86,109 while those with the same tenure but free from student loan payments had an average $107,687.

“The paying of student loan payments had a significant impact on the level of contributions of those contributing,” explained Craig Copeland, director, Wealth Benefits Research, EBRI. “However, some of the impact of the student loan payments appeared to be lessened by the design of the 401(k) plan such as automatic enrollment or employer contribution match levels as the median employee contribution rate for all participants studied was near the level of the maximum amount matched and/or common default rates in automatic enrollment plans.”

When payments stopped, around one third of people increased their 401(k) contribution rate, this was highest for those earning less than $55,000 (33.3% vs. 30.5%).

Sharon Carson, retirement strategist, J.P. Morgan Asset Management, commented on this.

“Consequently, financial wellness programs can help in the contribution and debt payment decisions by considering the total finances of the participant,” she said. “The payment status change can also be an important touch point in helping to improve the financial wellbeing of participants, as many appear to be making important financial decisions at this time and better information could improve outcomes.”