The impact of student debt on your client’s financial future

On. Off. On. Then off again… The student loan debt relief plan proposed by the Biden administration has had a difficult time getting off the ground. Courts blocked the proposed plan that would have forgiven up to $20,000 in student debt for qualified recipients. The issue is tied up in litigation, leaving many with student loans in limbo.1

Regardless of the outcome, the underlying issue remains: many Americans are burdened with too much debt. No matter their age, excessive student loans could negatively impact retirement plans, including those of some clients.

How much student debt is owed?

The amount of debt owed for student loans varies based on the school a person attends or the type of degree they pursue. In general, however, the typical undergraduate student will incur nearly $25,000 in debt upon graduation. Of great concern is that nearly one-third of borrowers never receive a degree, suggesting that the cost of education was too high.2 Without a degree, those borrowers may not be able to earn the higher salaries that would help pay for those loans. And that only widens the gap.

Many of those carrying student loans may be recent graduates entering the workforce. However, a surprising number of individuals have struggled for decades to pay off student debt. When it’s all said and done, about 16% of borrowers end up in default. Of them, about one-third are seniors. Black individuals may be impacted the most, with the typical Black borrower who started college in 1995-96 still owing 95% of their original student debt 20 years later.2

How student debt impacts financial milestones

Burgeoning student debt may lead some individuals to put off important financial milestones. They may find it difficult to contribute a portion of their salary toward a workplace retirement plan or take advantage of an employer match. They may question whether they’re better off paying down a loan or putting money down on a home.

Those with student debt could also find it more difficult to get other loans due to lower credit scores resulting from missed payments. Some may even delay getting married or having children.

Saving for retirement in spite of student debt

All is not lost for your clients who struggle to pay off student loans. Some may believe that they need to choose between making student loan payments or saving for the future. It doesn’t need to be an all-or-nothing proposition.

It’s important to remind clients that even small amounts set aside for retirement can grow and compound over time. Starting or improving a savings habit alone could be a big step toward a more financially secure future.

Other strategies include putting annual salary increases toward retirement savings. If an employer increases a client’s salary by 3%, they could save that extra money — or a portion of it — instead of spending it. Other extra income including bonuses, side hustles or sales of personal items through online marketplaces could all be designated toward retirement savings.

Recent legislation could also make it easier for those with student loans to save for retirement. Beginning in 2024, the SECURE Act 2.0 will allow employees to receive matching contributions from an employer simply for making their student loan payments.3 When meeting with clients, be sure they are aware of this potential benefit and encourage them to ask their employer about it.

The pros and cons of putting extra funds toward paying down debt versus investing is a strategic conversation that will require a deeper analysis of a client’s overall financial situation. For example, if student loan interest rates are relatively low, it may make sense to continue minimum payments while directing other funds toward investments with potentially higher returns.

What if student debt relief comes?

In the event that the Biden administration’s plan to forgive student loans comes to fruition, some of your clients may be eligible. If the original plan is implemented, eligible individuals will need to have an annual income below $125,000 (or $250,000 for married couples or heads of households). Pell Grant recipients who meet the threshold may be eligible for up to $20,000 in debt cancellation whereas non-Pell Grant recipients may receive up to $10,000 in debt relief.1 

When talking with clients about the potential for student loan debt relief, encourage them to direct any funds they might have otherwise put toward paying down their loan into a 401(k), Roth IRA or other investments with growth potential. If student debt relief becomes available, it’s important to plan where extra budget dollars will be spent.

Looming debt can leave clients feeling overwhelmed, leading some to potentially throw up their hands in defeat. Keeping a level head during times of uncertainty is a tactical strategy that may be easy to overlook. As a financial professional, you can help them navigate the swirling emotions that sometimes cloud their better judgment.

Use our Behavioral Financial Advice (BFATM) resources to help your clients build better decision-making skills and find the balance between what they want and what they actually do, and keep them moving toward their retirement savings goals.



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