It’s safe to assume that a significant percentage of Americans with student loan debt will need to make adjustments to their budgets when the federal student loan payment pause ends this fall.
Unfortunately, it’s also pretty safe to assume that one of the adjustments many will make will be to cut back on their 401(k) contributions, shifting at least some of those dollars to student loan payments instead.
According to new research by Empower, a startling 42% of Americans say they will consider curtailing retirement savings as they look for ways to make ends meet when federal student loan payments resume in October.
Empower’s research found that one in three households expect upcoming student loan payments of $1,000 per month. During the forbearance, 31% of borrowers didn’t make any payments, and many say they reallocated their debt payments to retirement contributions, debt paydown, and emergency savings.
To afford their student loan payments, 32% of Americans say they plan to take on more credit card debt. They also plan to cut back on discretionary spending (59%), dining out (59%), and almost a third (31%) of those surveyed are considering trading in their car and will say bon voyage to upcoming trips and vacations (41%).
To increase savings, 52% of Americans are considering switching to a higher paying job and 48% are planning on taking on a side hustle.
Other ways people are looking at saving include moving in with roommates or back to their parents’ house to cut down on housing costs. Nearly half of Gen Zers (49%) and 38% of Millennials are considering moving in with roommates to afford their monthly payments, and 39% of Gen Zers with student debt say they may move back in with their parents.
Moving to a lower cost area is another option on the minds of Americans with student loan debt, with 46% of Millennials and 47% of Gen Z saying they may relocate to a more affordable area, compared to 39% of the student loan population as a whole. But they won’t become homeowners in the process—some half of Americans with student debt (46%) may delay buying a home once payments resume, including 52% of Millennials, 45% of Gen Z and 39% of Gen X.
Almost one in five adults with student loans (18%) wish they invested the money to grow it in the market instead of taking on debt and had done more research before signing the note (23%). Higher education remains paramount to respondents with just 14% saying they wouldn’t go to college if they could do it all over again.
Pause and effect
The federal student loan payment pause and interest waiver enacted near the beginning of the COVID-19 pandemic in March 2020—and since extended several times—will end with interest set to begin accruing Sept. 1, 2023, and borrowers beginning to make payments again in October.
While the Supreme Court shot down President Joe Biden’s student loan forgiveness plan at the end of June, the Education Department subsequently announced several plans to help ease borrowers back into repayment, including a one-year “on-ramp” during which missed, partial or late payments will not lead to negative credit reporting, default or loans being sent to collection agencies. The provisions start Oct. 1 and are set to run through Sept. 30, 2024.
And the Biden administration’s “Fresh Start” initiative can return all federal student loans to a current status, even if they were delinquent or in default before the pandemic. The move is intended to help delinquent borrowers improve their credit score, enabling them to potentially qualify for new credit or to refinance to a lower interest rate on current loans.
A June 2023 survey from Morgan Stanley found almost half of low earners (making less than $50,000) say they will not be able to repay their loans once the payment pause ends. And the Consumer Financial Protection Bureau found half the borrowers who will have to start making payments in October have at least 10% more debt than they did before the pause, thanks in large part to more credit card and auto loan debt—and higher interest rates on that debt.
Student loan debt is frequently cited as a key reason people don’t save more for retirement. A Fidelity Investments study of American student debt found 79% say student loans impact their ability to save for retirement, with 69% reporting that they changed their retirement plan by lowering or stopping their contributions or by taking loans or hardship withdrawals. On average, participants with student debt contribute 6% less to their retirement accounts than individuals without student debt.
U.S. student loan borrowers owed a collective $1.78 trillion in federal and private student loan debt as of March 2023, according to the Federal Reserve. The average U.S. household with student debt owes $59,461, according to NerdWallet’s most recent look at household debt. For Class of 2020 graduates, 55% had student debt averaging $28,400, according to the most recent data available from College Board.
SEE ALSO:
• Biden Administration Cancels $39 Billion in Federal Student Loan Debt
• 10 States with Highest and Lowest Student Loan Debt
• 2 Secure 2.0 Provisions Could Be Financial Stress-Busters for Younger 401(k) Participants
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.