Saving and Student Debt Don't Mix

In the spring, I wrote about research that my former colleague Scott Cooley and I did on the effects student loans have on aspects of personal finance, particularly retirement savings. We recently released an interactive calculator so that users can see for themselves the potential effects of student loan paydown strategies on their net wealth at retirement. In this column, I extend the analysis we performed in our previous research paper.

To recap our earlier research, we found that the presence of student loans is associated with lower levels of retirement savings. Specifically, among HelloWallet users, a $1 increase in student loans is associated with a 17-cent decrease in retirement savings. These results are intuitive: Given scarce resources and competing priorities, workers can only divert so much of their money to paying down student loans and saving for retirement. Student loans, therefore, appear to exert a crowding out effect on retirement savings.

To dig into this issue a little deeper, I analyzed HelloWallet's user data. I examined the extent to which student loans affect deferrals to savings accounts and also whether users saved more in their retirement accounts after a student loan was completely paid down.

One unique advantage of HelloWallet data is that the accounts that users connect through the application are refreshed daily. Thus, we can observe the interplay between student loan balances and retirement account balances and deferrals. Unlike cross-sectional surveys that take a snapshot of a household's finances at a single point in time, we can see what happens to a user's finances after they have paid off their student loans. However, HelloWallet's users are systematically different from the working population, so it is hard to generalize the results we see in our users to all working households in the United States.

We do see that once a student loan has been paid off, users typically contribute more to their retirement accounts, even after controlling for age and income. Specifically, I found that workers who had paid off their student loans contributed nearly 12% more to their retirement accounts than workers who had not yet finished paying down their loans. This evidence reinforces our theory that there is significant interplay between student debt and retirement savings. Paying down student loans and saving for retirement are competing priorities for many workers, and focusing on one often comes at the expense of the other.

Furthermore, we see that users who have not yet paid off student loans tend to have lower HelloWallet spending scores. As one aspect of the composite HelloWallet Wellness score, users' spending score evaluates the extent to which they spend less than they earn on a consistent basis and are able to save some of their income for emergencies or other priorities. I found that workers without student loans had spending scores 8% higher than workers with student loans. That is, workers without student loans spent less than they earned more frequently and saved more of their disposable income for other priorities than workers without student loans.

Again, this is not very surprising given the tight budgets of many workers with student loans. But, in concert with previous analyses, this evidence underscores the importance of careful financial planning, as the presence of student loan debt crowds out other types of saving.

These results are aligned with our previous findings around student loans and continue to lend credence to the notion that student loans appear to crowd out retirement savings. These results are also not particularly surprising, as workers only have so much disposable income. And to be sure, going to college and incurring student loan debt is not unequivocally bad, as a higher future earnings potential can outweigh the costs of borrowing.

Rather, these results further underscore the importance for workers to carefully budget and plan so as not to fall behind on their retirement goals. Furthermore, given this data, employers may wish to consider altering their benefits plans to better meet their workers' needs with respect to paying down student loans.