Participants Should Not Pay Off Student Loan Debt Early

To answer the question, “Should workers prioritize paying off student loans ahead of schedule or prioritize saving for retirement,” HelloWallet analyzed its own user data and the Survey of Consumer Finances, a nationally representative survey conducted the by the Federal Reserve.

After controlling for age and income in HelloWallet’s user data, one additional dollar of student loans was associated with a $0.17 decrease in retirement savings, and in the Survey of Consumer Finances, one additional dollar of student loans was associated with a $0.35 decrease in retirement savings. “There are a number of reasons why the results differed slightly—HelloWallet’s users are not representative of the working population of the United States, for example—but the fact that these two data sources are directionally similar is certainly suggestive of student loans crowding-out retirement savings,” says Jake Spiegel, a researcher at HelloWallet.

HelloWallet also built an illustrative model to examine the impact of the decision to pay off student loans ahead of schedule and found there are very few circumstances in which paying down student loans ahead of schedule leads to a higher net wealth at retirement, particularly if a worker receives an employer match on retirement savings. A hypothetical 25-year -ld worker making $50,000, paying off a $20,000 loan, and receiving a 5% match on their retirement savings can accumulate 15% more savings at retirement if they focus on saving for retirement instead of waiting to save for retirement and dedicating all of their discretionary dollars toward paying off their loans ahead of schedule.

“Even if expected returns in the stock market are lower than the interest rate on the loan, saving for retirement wins out. This is because retirement savings, particularly for a young worker, will compound over a long time horizon. Furthermore, interest on student loan debt is tax-privileged for single workers earning less than $80,000,” notes Spiegel.

According to HelloWallet’s research report, in 1992, 10% of all households in the United States held education loans, which doubled by 2013. The average loan amount has increased from $9,400 to $27,300.

The research report may be downloaded from here.