Paying off student loans keeps more than 8 in 10 Americans from saving enough for retirement.
Student loan debt and retirement savings aren’t typically discussed together — but a new study suggests they should be.
By delaying saving for retirement, these young people might lose the ability to take full advantage of the powerful benefits of compound interest, that’s the snowball effect that occurs when reinvesting earnings on one’s savings to generate earnings, gets reinvested to create more earnings, and so on. Over time, compounding can substantially grow a person’s savings, so the earlier one starts saving, the better.
To be sure, a college degree remains one of the smartest investments a person can make in his or her financial future. A growing proportion of jobs require either a bachelor’s or associate degree or a certificate — and that trend will only accelerate. Colleges and universities must also focus on the issue of degree completion, which is a key factor in how student loan debt impacts borrowers’ financial lives. Many students who fail to graduate are unable to pay off their loans, even small ones, and end up worse off financially than when they first enrolled. Their default rate is almost 25%, compared with 9% for students who complete their degrees.
An equally important task for policy makers is to address the issue of Americans’ low financial literacy levels, which hinder people’s ability to effectively manage their financial lives. We know that high financial literacy levels are linked to the kinds of behaviors that increase financial well-being, like saving for retirement, having an emergency fund, and tracking spending.
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