Student loans take a toll on retirement readiness

Joint research between J.P. Morgan Asset Management and the Employee Benefit Research Institute uncovers how student debt impacts contribution rates and plan balances

In brief

  • Student loan debt can significantly damage retirement readiness.
  • Joint research between J.P. Morgan Asset Management and the Employee Benefit Research Institute reveals links between student debt, 401(k) contribution rates and plan balances.
  • Plan sponsors can take specific steps to help their employees both manage their student debt and save for their retirement.

There’s no denying that student loan debt can wreak havoc with a household’s finances. Year after year, interest payments eat into earnings as loan balances decline at a snail’s pace. The debt is a burden, clearly, and one that is shared by upward of 45 million Americans who shoulder more than $1.6 trillion in student loans.1

But how does student debt affect retirement readiness? It’s been an open question.

The latest research collaboration between J.P. Morgan Asset Management and the Employee Benefit Research Institute (EBRI) tackled the subject, examining 51,567 single-person de-identified Chase customer households2, for which we had complete 401(k) and spending data from 2017 through 2019. 

The numbers tell a compelling story. We uncovered strong evidence that student debt damages retirement readiness.

As student loan payments recently resumed after more than a three-year pandemic era pause, the subject has taken on new urgency.

Plan sponsors will want to consider the implications of our findings, especially as it relates to the employer match in 401(k) plans and the need for employee education on the prioritization of savings and debt repayment.

How we conducted our research on student loans and retirement

For active plan participants, we analyzed student loan debt payments, 401(k) balances and 401(k) contributions. Employees who did not contribute although eligible to do so were not included in this analysis; whether student debt played a role in this decision is beyond the scope of our research.

Not surprisingly, perhaps, we found that student debt is more prevalent with younger, less tenured employees and those with incomes above $55K. Here, “tenure” refers to the period of time a participant is continually employed by the same employer.

Impact of student loan payments on 401(k) contributions

Sifting through the data, we asked a basic question: What happens to 401(k) contributions when student loan payments start or stop?

When the payments stopped, about one-third of the population increased their contributions. The median increase in the average contribution rate was 2.5%. We discovered that when student loan payments started, roughly one-quarter of the population decreased their 401(k) contributions (Exhibit 1). The median decrease in the average contribution rate was 2.7%.

Analyzing action (or inaction) related to contribution rates proved revealing. It highlighted the power of default contributions and the incentive of the employer match.

Specifically, we found that people who decreased their contribution rates when student loan payments started had higher average contribution levels, across income levels, than those who did not decrease their contribution rates. People with relatively lower contribution rates, on average, did not decrease their contributions (Exhibit 2)

The power of inertia may offer a likely explanation, in our view. That is, participants were defaulted into the relatively lower rate, possibly contributing just enough to receive the employer match—and then made no further changes.

Our findings underscore how plan design elements, especially default rates and employer match, can impact participant finances in ways employers might not expect.

Relative damage to 401(k) balances

We were not surprised to see a gap in 401(k) balances between those with and without student loan debt. But we were struck by the relative impact by income levels. Among people making at least $55K, 401(k) balances were significantly higher for those who were not making student loan payments vs. those who were (Exhibit 3).  Similarly, we found that contribution rates were higher for those without student loan payments.

These lower 401(k)  balances can be especially destructive for those with incomes over $55K. That’s because Social Security will replace a relatively smaller share of their pre-retirement income compared with those who make less—increasing the savings target needed for a successful retirement.

Key takeaways for a 401(k) plan sponsor

How can plan sponsors best help their employees saddled with student debt? And, in particular, how should they think about the employer match in a plan?

A provision of the SECURE 2.0 Act allows employers to match an employee’s student loan payment in the form of a contribution to the company’s 401(k) plan. The provision aims to help employees who are not contributing to a 401(k), or not contributing up to the maximum match rate, because of their student debt burden.

But some employers might worry that the provision could have the unintended consequence of discouraging plan contributions. In other words, if employees with student loan debt don’t have to contribute to receive the employer match, might some opt out of contributing altogether or contribute less? It’s a reasonable question, especially because we have observed a large portion of the population contributing what seems to be just enough to meet the employer match.

In some cases, especially for participants making under $55K a year, matching student loan payments might very well lead employees to stop making 401(k) contributions—since they would get the match anyway. But if participants are defaulted into a plan, perhaps inertia would be enough to keep them contributing. In addition, matching student loan payments would allow some participants who are not contributing at all to build a new pool of savings.

For employers, deciding whether or not to offer a student loan match may ultimately depend on participant and plan characteristics and the role of defaults and automatic enrollment. We recommend that employers look carefully at the profile of their plan participants—their income level, participation rates and opt-out rates for defaults—to determine the best course of action.

For example, if most employees are only saving up to the match level (and that is not the plan default), matching student loans may discourage them from saving in the plan.

But if many employees in an educated workforce are not participating in the 401(k) plan at all, a student loan match may help employees who are unable to save because of their student loan debt.  Employers may consider surveying those not participating in a retirement plan to understand if student loan payments are indeed a key factor holding them back.

Plan sponsors that implement the SECURE 2.0 provision for student loan repayment matching may consider targeted communications to participants when these payments stop. At that juncture, an employee will likely have a greater capacity to save for retirement. Employers that do not implement the matching provision may consider sweeping nonparticipating employees via automatic enrollment each year to capture those who may have the capacity to contribute (i.e., once student loan payments stop).

More broadly, employers can develop or strengthen their employee education programs to help employees prioritize their savings and debt payments. In Exhibit 4, a slide from our Guide to Retirement, we present our suggested approach.

  • The first step: Build an emergency reserve of two to three months of net income.
  • Next, contribute enough to a retirement plan to receive the employer match and maximize the preferential tax treatment for retirement plan contributions.
  • The third step: Pay down loans such as credit card balances or student loan debt. However, we note that if an employee is saddled with loans carrying very high interest rates (7% and up),  it might be prudent to reduce or eliminate that debt before making contributions beyond what’s needed to receive an employer match.

As our research reaffirms, student loan debt presents a particular challenge to millions of Americans. Plan sponsors can help employees meet that challenge in ways that minimize the threat to retirement readiness and help build more sound personal finances. That’s a worthy goal for all employees, whether or not they have student loan debt.

1 Federal Student Aid, 2023; J.P. Morgan Asset Management, College Planning Essentials, 2024.
2 This number represents the number of households we shared with EBRI to conduct the analysis. JPMorgan Chase Bank, N.A. (Chase) serves nearly half of America’s households with a broad range of financial services including checking, savings, investments, credit cards and loans. In this analysis, the Chase data sample is restricted to the households in 2017-2019 who use Chase as their primary banking institution, and their total household spending through all payment mechanisms (select credit and debit card transactions, electronic payment transactions, check and cash payments) and sources of income including wage income, Social Security, annuity, pensions, etc. can be linked to the EBRI/ICI 401(k) Plan Database. For more information about Chase, visit the following website: