How Student Loan Debt Payments Are Cutting Into Employee 401(k)s

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After an extended hiatus of about 3.5 years, student loan payments resumed in October 2023. Many of those who are repaying student loans became used to not having to budget several hundred dollars — or more — per month toward their debt over the past few years. And now, with the cost of living being more expensive than it was back in March 2020, having to resume payments is likely putting a strain on some borrowers’ finances in more ways than one.

A recent research report by the Employee Benefit Research Institute and J.P. Morgan Asset Management found that student loan debt was a growing financial issue for many individuals and families before the COVID-19 pandemic, and the required payments impacted some people’s 401(k) contributions. According to the report, considering the impact student loan debt payments made on 401(k) contributions and participant balances in the past can indicate what could happen in the future.

Here’s what you should know.

Information About the Participants and Duration of the Study

The study took place from 2017-2019  — the most recent years before the student loan suspension due to the COVID-19 pandemic — and included 51,567 participants.

According to the research report, approximately 20% of the participants in the study made payments on their student loans in at least one of the three years the study covered, whereas approximately 12% made payments during all three years.

The likelihood of study participants having student loan payments was increased if they were younger or had a higher income. The likelihood was lower for those with longer tenures.

How Income Affected 401(k) Contributions

According to the research report, among people with incomes less than $55,000 who were making student loan payments during the three-year period, the average employee contribution rate was 5.3%. For those not making student loan payments during the same period, the average employee contribution rate was a bit higher, at 5.7%.

For people with incomes of more than $55,000 who were making student loan payments, the average employee contribution rate was 6.1%, while those in the same income range who weren’t making payments had a higher average contribution rate of 7.3%, which equals a larger rate difference than what applied to people making income of less than $55,000.

How Tenure Affected 401(k) Balances

When looking at the ending balances of 401(k) accounts by tenure, the average was lower for those who made student loan payments than for those who didn’t.

This was particularly evident among study participants who had incomes of $55,000 or more. For example, among those who had tenures of more than 5 years to 12 years, the average balance was $86,109 for those who made payments — versus $107,687 for those who did not.

How Stopping Payments Affected 401(k) Contributions

Stopping student loan debt payments had a positive effect on some people’s 401(k) contribution rates. Approximately 32% of participants who were making student loan payments at the beginning of the three-year study period and stopped before the end increased their 401(k) contribution rate at least one percentage point once their payments stopped.

The Takeaway

The study found that making student loan debt payments had a “statistically significant” negative impact on both the average employee contribution rate and account balance by the end of the study.

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