How student loans may impact retirement planning for Gen X

As Gen X approaches retirement age, student loans could be holding them back

Student loan debt impacts tens of millions of Americans, and statistics from LendingTree put the number of total owned debt at around $1.77 trillion. Carrying debt often impacts the ability of Americans to save for retirement, and that's proving to be the case for Generation X.

"...approximately 13% of working Gen Xers carry student loan debt, with an average amount of $40,000."

Born between 1965 and 1980, the first members of Gen X to reach retirement age will do so in the next several years. According to a recent National Institute on Retirement Security (NIRS), approximately 13% of working Gen Xers carry student loan debt, with an average amount of $40,000. This persistent debt can have an impact on retirement planning for members of Generation X as many of them approach retirement age.

“Every dollar they continue to spend on college loans is money that could have been invested in their retirement. Retirement is going to be a nightmare for too many Gen Xers, and those who continue to have the burden of debt could be saving more for this major challenge,” said Tyler Bond, research director at NIRS.

There are about 62.5 million members of Gen X, and as they inch closer to retirement age, it’s important for financial professionals to be ready to discuss this concern with their clients.

The obstacles

Gen X is unique for several reasons — and not because its members still listen to Nirvana. It’s also the first generation where, for many private sector workers, pensions were replaced by defined contribution retirement plans. Also, Gen X was the first generation to go to college when education costs started to rise.

According to The New York Times, researchers found that these two shifts occurring at the same time have created obstacles that the previous generations did not encounter. Specifically, the presence of student loans has greatly impacted the amount people contribute to their 401(k).

“It’s the presence of any loan at all; if you have a loan, you probably think of yourself as not having the bandwidth to think about retirement yet,” Matt Rutledge, an associate professor of the practice of economics and a research fellow at Boston College’s Center for Retirement Research, told the Times.

There are also other factors to consider, says Alvin Carlos, CFA, CFP®, financial planner and managing partner at District Capital Management. Many members are Gen X are squarely in the “sandwich generation,” and that can add another wrinkle to the equation.

“They’re also trying to take care of aging parents. This is the time when parents are getting old and maybe thinking about entering a nursing home, and if they don’t have long-term care insurance this might fall on their children,” he says. “They’re also thinking of their family, trying to take care of their kids.”

Finding the solution

Carlos says that in his experience, student loan payments can range from $300 to $1,300 a month for his clients. And while no two clients are the same, there are some avenues available to help them manage their student loan debt. The first is unique to those who work for certain non-profits or for the government.

“We work with them and tell them you can avail yourself of public service loan forgiveness — your loan will be wiped out after 10 years of service,” Carlos says.

"It’s also important to recognize that it’s never too late to start."

Of course, things are different for those who work in the private sector. Carlos says that for them, it all comes down to budgeting — he even recommends some of his clients open a separate checking account purely for recreational expenses in an effort to make it easier to compartmentalize expenses.

“If you are working for the private sector it’s going to be a matter of budgeting for that and making sure that your other expenses are under control.” Carlos says. “The ones that tend to creep up are restaurants and shopping — you want to make sure you have a system in place to get that under control.”

Pay yourself first

The concept of “paying yourself first” is one that Carlos tries to convey to many of clients. Put simply, this is the idea that if you want to have the retirement you’ve always envisioned, you have to make it a priority, whether that means paying off student loan debt, contributing to a retirement account, or delaying certain expenses while you can.

“The concept of paying yourself first sometimes resonates with people,” he says. “Max out your 401(k). Max out your IRA. Take advantage of everything that’s available to you. If you can delay certain expenses — like maybe you got a new higher paying job, you might think I’ll buying a bigger home — delay doing those bigger expenses if you don’t need to do it.”

Taking advantage of what’s available

The recently passed Secure Act 2.0 contains a provision aimed at mitigating the impact of student loans. Starting in 2024, a participating employer can base their matching contributions on their employee’s student loan payments rather than on their employee’s own contribution to their retirement plan. In effect, this means an employee who doesn’t feel they can contribute to their retirement plan due to their student loans can do so thanks to the employer match.

“The initial understanding is that whatever [the individual] is paying in their student loan payment would be the amount the employer can match (subject to normal annual contribution limits applicable to the plan),” says IRI’s Director of Compliance and Implementation Rebecca Plowman.

It’s also important to recognize that it’s never too late to start. Bond recently told Reuters that younger Gen Xers have at least 20 years left in the workforce, so there may be ample time to start contributing a retirement account.