A new analysis examines how student loans could impact the retirement savings of older debtors more than any other generation.
The new research by The New School’s Schwartz Center for Economic Policy Analysis (SCEPA) spotlights the over 1.4 million workers and 820,000 unemployed people ages 55 and above who have outstanding student loans attributed to either them or their spouses, pulled from data by the Federal Reserve Board’s 2022 Survey of Consumer Finance (SCF).
SCEPA makes the point that student loans are generally coincided with younger workers or are known as a financial concern among employees starting their careers, yet over 2.2 million borrowers are older workers who are saddled with debt.
Additionally, younger debtors have 20 to 30 years, or more, to pay down their debt while saving for retirement, whereas older workers who went back to school in their mid-careers do not have as long of a timeframe, said Karthik Manickam, a PhD student in the Economics Department at the New School for Social Research and a Schwartz Doctoral Research Fellow at SCEPA, in a press call with reporters.
“[Paying back student loans] is contingent on you getting access to a higher pay job or contingent on you having the time to work for long enough to repay those loans,” Manickam stated. “Older workers don’t get the same amount of time. If you have debt in your 40s and 50s, but you expect to retire at 65, that’s a much different picture compared to someone in their 20s and 30s and who are expecting to retire when they’re 65.”
Half of all debtors over the age of 55 who are still working are in the bottom half of income earners and make less than $54,600, finds SCEPA calculations based on the SCF data. Only 3.7% of older borrowers make the top 10%, with a salary of over $192,000 a year.
In the research, Manickam also highlights the “sheepskin effect,” which impacts workers who have not finished their degree but must continue to pay back the loans they previously took out. According to findings, 14.9% of workers ages 55 to 64 and 17.2% of employees 65 and older have not completed their degree for which they took on debt for. As these workers did not finish schooling, their likelihood of having a high paying job is unlikely, SCEPA finds. As a result, they face both an indebtedness and a lack of earning power. SCEPA finds that all debtors without completed degrees are in the bottom 90th percent income level of older workers.
Impacts to retirement security
Seasoned workers who take on student debt could be repaying their loans well into their retirement—the data found that those ages 55 to 64 expect to repay their loans within 11 years, while workers 65 and over are likely to pay back their loans in 3.5 years, on average.
Yet, retirees who cannot afford to repay their loans could find themselves in precarious situations. If a debtor defaults on their student loan, that loan then develops a “delinquent” status, according to Manickam. This status could prompt Social Security to garnish retiree benefits and reduce their retirement income.
For example, Manickam used a scenario in which a worker, who lost his job in the 2008 financial crisis, enrolled for a master’s degree and took on private and public loans. Today, the worker is 55 years-old and earns a median income of $54,600 but still owes $50,000 in debt at a 4.3% interest rate. To retire by age 65 without any student debt, he must repay $5,364 a year. If he were to lose his job and decide to prematurely withdraw his Social Security benefits but then default on his federal loans, he could lose $2,500 in garnished benefits a year.
Policy solutions
The SCEPA calls on several policy interventions to empower workers in saving for retirement. One such reform is the Savings on a Valuable Education (SAVE) Plan, introduced by the Biden Administration in 2023, which would provide loan forgiveness and an income-driven repayment plan for workers to enhance retirement security.
Another solution includes ending Social Security garnishing. In March 2024, over 30 members of Congress called on the Social Security Administration (SSA) to end the garnishing of Social Security in repaying federal loans. “This reform would help protect retirees and older workers who are already financially precarious,” wrote Manickam in the research. “This basic protection would help many American seniors stabilize their finances, improve their economic security, and be able to retire.”
SEE ALSO:
- Student Loans Preventing College Grads From Major Life Milestones
- Biden Administration Cancels $39 Billion in Federal Student Loan Debt
- FAFSA Changes Could Inspire Additional Retirement Savings
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.