Will the Explosion of Student Debt Widen the Retirement Security Gap?

Student loan debt was $1.2 trillion in 2015, compared to just $0.2 trillion in 2003. It now accounts for more than 30 percent of total household non-mortgage debt, having surpassed credit card debt in 2011. The average student debt level for recent college students in 2013 was $31,000. The question is whether start­ing out $31,000 in the hole could have a big impact on households’ retirement preparedness. This brief uses the National Retirement Risk Index (NRRI) to assess the impact of growing student debt on the retirement security of today’s working-age households. The NRRI is calculated by comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target replacement rates that would allow them to maintain their standard of living. These calcula­tions are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nation­ally representative sample of U.S. households. As of 2013, the NRRI showed that, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), 51.6 percent of households were at risk. The question at hand is how this percentage will be affected by the growth in student loans. The discussion proceeds as follows. The first sec­tion briefly describes the nuts and bolts of the NRRI. The second section explores the growth in student debt and the paths through which it can affect retire­ment security. The third section looks at the relation­ship between having student debt and retirement risk status. The fourth section estimates the impact on the NRRI of assuming that all of today’s working households started out with the same level of loans as recent college students. The results show that such an increase in student debt would raise the share of households at risk in retirement by 4.6 percentage points. The final section concludes that the growth of student debt will add to an already alarmingly high rate of households that are not on track for retire­ment.