Student loans now impact every demographic, and that's bad news for people struggling to save for retirement.

Even though interest rates are lower, overall student debt has soared during the pandemic, regardless of a borrower’s age or occupation. Some 44 million Americans now owe an estimated $1.67 trillion in student debt.

Key Takeaways

  1. No longer just a younger person's problem, spiraling student debt now affects every generation’s ability to save for retirement.
  2. The total amount of student debt is estimated to be $1.67 trillion, owed by 44 million Americans.
  3. Older people could face a serious shortfall in savings, and younger people who are saving inadequately will miss out on the advantage of a long investing time horizon.

The spiraling amounts of debt are having a serious impact on every generation’s retirement outlook. A substantial majority—80%—report that student debt is cutting into their ability to save adequately for retirement, according to Fidelity Investment's latest study of American Student Debt. The main challenges are saving nothing or very little for retirement, and taking out loans against 401(k)s.

Failing to save adequately or even any amount for retirement because of outstanding student loans will have a substantial impact on people's retirement readiness.

Fidelity analyzed data from nearly 60,000 Student Debt Tool users, who shared loan information that represents more than 5,000 companies as of Sept. 30.

The CARES Act allows student loan borrowers to pause on payments, interest-free, when the loans are federally held. This relief has now been extended through Dec. 31, 2020. But even with the pause in place, people carrying student loan balances are still struggling to save for retirement.

Nearly one in five of the tool's users (18%) reported contributing nothing to their 401(k), and slightly more than that (22%) said they were able to contribute just 1.5% of their salary to retirement savings. Almost a quarter (23%) said they had an outstanding loan against their 401(k).

Baby boomers have the highest average monthly payment, at $722 in 2020, based on an average balance of $75,000.

Fidelity also examined which occupations have higher amounts of debt, which then mean higher monthly payments. In most cases, average loan balances show a rise from the previous year. The industry with the highest loan balance, for example, is private health and social assistance—professions such as doctors and dentists—have an average balance of $83,000, up from $75,000 in 2019. That outstanding debt results in an average monthly loan payment of $801, up from $685 a year prior.

That means healthcare workers are not only on the frontlines every day caring for others during the pandemic, but they are also the ones struggling the most with student debt, points out Asha Srikantiah, head of Fidelity Investments’ student debt program. 

People of All Ages Have Student Loans

The problem of student debt is better understood than it was five years ago.

Previously, it was perceived as a young person’s problem, Srikantiah says, confined to the college loans people would pay off in their 20s. The general expectation is that graduates would be done paying off the loans in their 30s.

“That’s not the case,” Srikantiah said. “Second, it’s not only the fact that people are carrying debt for much longer, because they have great debt loads. The demographics taking out debt have changed.”

Baby boomers in particular are carrying ever-higher student loans, with the amount of debt increasing by 33% over 2019. These are loans, whether federal or private, that boomers are taking out in their own names for their children’s college educations. The so-called Parent PLUS loans—a federal loan available to the parents of undergraduate and graduate students—are responsible for the rising numbers.

For those approaching retirement in their 50s and early 60s, not contributing enough can mean inadequate savings and over-dependence on Social Security. But there is also a downside for younger people. They are in the best time of their lives from an investing perspective, Srikantiah says. Not saving enough means they miss out on the opportunity to take advantage of compounding interest over several decades. “They will start out farther behind their peers,” Srikantiah said.

Also worriesome is that people are in debt for longer periods of time. “The perception used to be people would carry it for 10 years or so,” Srikantiah said. “Now it’s closer to 20 or 25 years. If you are paying $200, $300 or $400 a month, that will have a direct impact on your ability to [save enough to] get by and enjoy your life in retirement.”

A Student Debt Catch-22?

“If someone didn’t have student loans because they didn’t go to college, they might not have as much money,” says higher education expert Mark Kantrowitz, vice president of research at “A lot of these analyses never ask that.”

Kantrowitz admits that college debt drags on saving for other priorities and spending, but having the degree generally garners a higher income.

In fact, several key factors play a part in the issue of student debt, according to Kantrowitz, the author of “How to Appeal for More College Aid.” 

College students tend to borrow the highest amount instead of the actual sum needed. “When they get their refund—after student aid is applied to fees and tuition, the rest is refunded—the student spends it,” Kantrowitz said. Doing so just adds an unnecessary amount to the debt they are incurring.

“In most cases, it’s student loan money that has to be repaid with interest,” Kantrowitz said. “Every dollar you borrow is going to be $2 when you repay it.”

Students should set a goal of minimizing debt. People tend to dismiss the amount of debt they’re taking on when choosing a college, Kantrowitz says, but college choice has a big consequence. “Often families want to send their child to the most expensive, not the least expensive college,” he said. “Financial fit is not factored into the decision. Oftentimes parents say, ‘You get in and we’ll figure out a way.’ “

That can easily lead to too much debt for parents as well as students. In either case, an overly burdensome debt load can mean the student drops out when they can no longer afford to attend, or they keep on piling up debt.

“It’s made harder by colleges having award letters that blur the distinction between awards and loans,” Kantrowitz said, “which decreases the awareness of the debt and leads to people borrowing more than they should.”

Saving for Retirement Is Still Critical

Even when saving is difficult, it’s better to save any amount at all, says Luis Strohmeier, CFP, partner and wealth advisor at Octavia Wealth Advisors, even if it’s 1% or 2%. If your employer offers a matching retirement contribution, you can actually double your savings by getting that money. “When you factor in what you save on taxes,” Strohmeier said, “it’s more palatable.”

Those between the ages of 20 and 40 who make less than $137,000 should look into a Roth IRA. The investing time horizon, which is several decades, mean you will gain the advantage of compounding interest. “That money is going to be tax-free [at retirement],” Strohmeier said.

Two strategies can make it easier to save more money. If you’re one of the many people who gets an annual increase in salary, save that extra money. Salary increases have dipped in 2020 to an average of 2.9%, from 3.3% that was expected before the pandemic took hold, according to SHRM.

“If you were living without it, why not put it away?” Strohmeier said. Although most people may be unlikely to save their entire raise, taking even half the amount and saving it puts your hands on newfound money. The same advice goes for bonuses. “You don’t necessarily count on these, so save them,” Strohmeier said.

Other ways to come up with money to save for retirement can come from a hard look at your expenses. Comb through your budget—a necessity for everyone, Strohmeier says—and account for every dime you spend. Look for the things you don’t truly need. Once you figure out some negotiable items, such as coffee or snacks that you buy during the workday, multiply the daily figure you were spending on these by 20 to arrive at a total you can save each month.

Don’t overlook the positive impact retirement saving can have on your credit score. “Saving money in a retirement plan improves your score,” Strohmeier said, “because you are showing liquidity when you apply for loans, even if it can’t be used as collateral.”

Avoid taking a loan from your 401(k) at all costs. “It’s probably the worst move you can make,” Strohmeier said.