Making student-loan debt payments was found to have a “negative impact” on both the average 401(k) employee-contribution rate and account balance, according to a new research report published Feb. 8 by the Washington, D.C.–based Employee Benefit Research Institute (EBRI) and J.P. Morgan Asset Management. 

The report, “Student Loans and Retirement Preparedness,” provides information on how student-loan debt payments affect 401(k) contributions of those who are contributing and whether participants increase or decrease their contributions when the status of their student-loan payments changes, or when payments end or start. 

Provisions in the legislation SECURE 2.0 allow for many potential changes to 401(k) plans and financial-wellbeing programs, including matching contributions to 401(k) plans from student-loan debt payments. However, many benefit changes can result in “additional expenses,” and in some cases, these additional expenses might not result in the “impact that was expected,” EBRI said in its news release about the report.

As a result, the researchers reviewed 401(k) plan recordkeeper data on balances and contributions of active participants linked with banking data from these same participants to see if they are making student-loan payments.

Researchers examined a three-year period to determine if contribution changes resulted after stopping and starting payments. They were also looking to determine if student-loan payments were made in prior years instead of just a one-year snapshot, which could miss participants who were making payments in the year(s) prior to an analysis year, EBRI said.

The Employee Benefit Research Institute and J.P. Morgan Asset Management are conducting this study as part of an ongoing joint effort to deliver data-driven research to better understand how the financial factors faced by 401(k) plan participants outside of their 401(k) plan impact their retirement preparations. 

Overall, the goal is to provide insights to help build a stronger retirement system by policymakers, plan sponsors and plan providers, the EBRI said.

Research findings

The study found that among those with incomes less than $55,000, the average employee-contribution rate of those making a student-loan payment during the three-year period was 5.3 percent compared with 5.7 percent for those not making student-loan payments. The difference is larger among those with incomes of $55,000 or more: 6.1 percent contribution rate for those with payments versus 7.3 percent for those without payments.

When looking at the ending account balances by tenure, the average was lower for those who made student-loan debt payments than for those who did not make these payments. The differences are “particularly pronounced” among the participants with incomes of $55,000 or more. For example, among those with tenures of more than 5 years to 12 years, the average balance for those who made payments was $86,109 versus $107,687 for those who did not make payments.

Of the participants who were making student-loan debt payments at the beginning of the study period and had stopped before the end of the study, 31.6 percent increased their contribution rate by at least one-percentage point after the payments had stopped. The share that increased was slightly higher for those with incomes less than $55,000 at 33.3 percent compared with 30.5 percent for those with incomes of $55,000 or more.

Making student-loan debt payments was found to have a “statistically significant negative impact” on both the average employee-contribution rate and account balance at the end of the study when using regression analysis, EBRI noted.

“The paying of student loan payments had a significant impact on the level of contributions of those contributing,” Craig Copeland, director of wealth benefits research at EBRI, said in the news release. “However, some of the impact of the student loan payments appeared to be lessened by the design of the 401(k) plan such as automatic enrollment or employer contribution match levels as the median employee contribution rate for all participants studied was near the level of the maximum amount matched and/or common default rates in automatic enrollment plans.” 

“Yet, many participants adjusted their contributions as their student loan debt obligations outside of the plan changed. Consequently, financial wellness programs can help in the contribution and debt payment decisions by considering the total finances of the participant,” Sharon Carson, retirement strategist at J.P. Morgan Asset Management, said. “The payment status change can also be an important touch point in helping to improve the financial wellbeing of participants, as many appear to be making important financial decisions at this time and better information could improve outcomes.” 

About the research

Single-customer households who were ages 65 or younger in 2017 from the Chase data were matched with participants from the EBRI/ICI 401(k) Plan Database. These single-customer household participants must have complete data in both datasets in each year from 2017-2019. The 401(k) data only included active participants. 

The years of 2017-2019 were chosen since they are the most recent years before the suspension of student-loan payments during the COVID-19 pandemic, which is expected to be closer to environment going forward, EBRI said. This resulted in 51,567 single customer household participants for the study’s analysis.