Student loans are quietly gutting your retirement — especially in your 40s

Saving for retirement or paying off student loans? For many people, it’s one or the other, not both.

And the loan typically wins.

The pattern persists at all age levels, but hits hardest in midlife. People in their 40s with student debt have a median retirement account balance roughly 45% lower than those who don’t, the Employee Benefit Research Institute (EBRI) found.

“The magnitudes of the differences at the different age groups between those with and without student loan debt is quite remarkable,” Craig Copeland, EBRI’s director of wealth benefits research, told Yahoo Finance. “The data really showed … that persistent effect of having lower contributions starting in the 20s, and losing out on that compounding that catches up to you in your 40s.”

The debt load is heavy. One in five 401(k) plan participants between 25 and 69 has student loan debt, according to the EBRI report. 

Younger workers, of course, are more likely to have student loan debt, but a stunning number of those over 50 are either paying down their own loans or loans for their children — 12.9% of participants between ages 55 and 59 and about 8% between 64 and 69. 

Read more: How the Federal Reserve’s rate hike impacts student loan interest rates

One reason for the savings gap between those who have student debt and those who don’t is that those carrying debt were more likely to stop contributing to a 401(k) plan or cut contributions if they stayed enrolled, the report found. 

Younger student loan borrowers were far less likely to participate in an employer-provided retirement plan at all when eligible. 

Roughly 4 in 10 people with student loan debt contributed less than 4% of their pay to their retirement account, which means they miss out on the full match from their employer. 

The employer match has long been a coveted boost for retirement savers. Most employers are contributing closer to 4.5% on average, according to Vanguard.

People with student loans often “fall behind early and never catch up,” Copeland said.

Potential lifeline: Company match

If you work for an employer that offers a 401(k), 403(b), or similar workplace plan, there is an option that can help you save for retirement and pay off student loans simultaneously.

Employers can consider student loan payments as qualifying contributions toward retirement plan matching programs thanks to the Secure 2.0 Act, which included a package of retirement-related provisions aimed at ratcheting up savings.

Here’s how it works: If your employer provides a retirement plan match and you’re paying down your student loan, you can count your monthly student loan payments as your “contribution” to your retirement account.

Companies add the matching retirement funds into a worker’s account, even if the worker isn’t contributing but is paying back student loans instead. 

About 42% of US companies currently offer this benefit, according to EBRI.

“It hasn’t been quickly adopted because it’s not something employers have to do,” Copeland said. “And there were a lot of provisions in Secure 2.0 you had to do. And those obviously got priority.” 

The new EBRI research estimates that universal adoption of a student loan retirement matching program could add anywhere from $11.2 billion to $20.2 billion in annual 401(k) matching contributions, depending on the assumed maximum employer match.

“The biggest upside is that employees need not choose between repaying student debt and receiving an employer retirement match,” said Olivia S. Mitchell, a professor at The Wharton School of the University of Pennsylvania.

“Borrowers who direct much of their earnings into loan repayments can still accumulate retirement assets and benefit from years of investment growth. This is quite critical for younger employees and workers in professions requiring expensive degrees.”

Companies are slowly adding the option for their workers. “We’ve seen solid adoption of our student debt retirement benefit over the last two years,” said Jesse Moore, head of student debt at Fidelity Investments. “More than 200 companies have added the benefit to date, representing more than 1.8 million eligible employees.” 

There has also been an “uptick in first-time retirement savers, or people who had $0 in their 401(k) before enrolling in the benefit,” Moore added. Since the program launch, more than 7,500 participants have started saving in their retirement plans for the first time.

This can be a retirement game changer, especially for new graduates kicking off their careers. The average federal student loan balance is $40,467, according to the Fed, and $390 is the average federal student loan payment.

There are drawbacks: “The benefit does not directly reduce student debt,” Mitchell said. “Employees sometimes misunderstand ‘student loan match’ as an employer loan payment, while the employer contribution actually goes into the retirement plan.”

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky and X.

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