Morningstar Magazine - October/November 2016 - 22
Dispatches
Saving and Student
Debt Don't Mix School
loans can crowd
out a consumer's ability
to save for a rainy day.
H E L LO WA L L E T
Jake Spiegel
In the April/May issue of the magazine, I wrote
about research that my former colleague
Scott Cooley and I did on the effects student
loans have on aspects of personal finance,
particularly retirement savings. We released
an interactive calculator in September so
that users can see for themselves the potential
effects of student loan paydown strategies
on their net wealth at retirement. In this column,
I extend the analysis we performed in our
previous research paper.
To recap our earlier research, we found that the
presence of student loans is associated with
lower levels of retirement savings. Specifically,
among HelloWallet users, a $1 increase in student
loans is associated with a 17-cent decrease
in retirement savings. These results are intuitive:
Given scarce resources and competing
priorities, workers can only divert so much of their
money to paying down student loans and
saving for retirement. Student loans, therefore,
appear to exert a crowding out effect on
retirement savings.
To dig into this issue a little deeper, I analyzed
HelloWallet's user data. I examined the extent
to which student loans affect deferrals to savings
accounts and also whether users saved more
in their retirement accounts after a student loan
was completely paid down.
One unique advantage of HelloWallet data
is that the accounts that users connect through
the application are refreshed daily. Thus, we
22
Morningstar October/November 2016
can observe the interplay between student
loan balances and retirement account balances
and deferrals. Unlike cross-sectional surveys
that take a snapshot of a household's finances
at a single point in time, we can see what happens
to a users' finances after they have paid off
their student loans. However, HelloWallet's users
are systematically different from the working
population, so it is hard to generalize the results
we see in our users to all working households
in the United States.
scores 8% higher than workers with student
loans. That is, workers without student loans spent
less than they earned more frequently and
saved more of their disposable income for other
priorities than workers without student loans.
Again, this is not very surprising given the
tight budgets of many workers with student loans.
But, in concert with previous analyses, this
evidence underscores the importance of careful
financial planning, as the presence of student loan
debt crowds out other types of saving.
We do see that once a student loan has been
paid off, users typically contribute more to
their retirement accounts, even after controlling
for age and income. Specifically, I found
that workers who had paid off their student loans
contributed nearly 12% more to their retirement
accounts than workers who had not yet
finished paying down their loans. This evidence
reinforces our theory that there is significant
interplay between student debt and retirement
savings. Paying down student loans and
saving for retirement are competing priorities
for many workers, and focusing on one often
comes at the expense of the other.
These results are aligned with our previous
findings around student loans and continue to lend
credence to the notion that student loans
appear to crowd out retirement savings. These
results are also not particularly surprising,
as workers only have so much disposable income.
And to be sure, going to college and incurring
student loan debt is not unequivocally bad,
as a higher future earnings potential can outweigh
the costs of borrowing. Rather, these results
further underscore the importance for workers
to carefully budget and plan so as not to
fall behind their retirement goals. Furthermore,
given this data, employers may wish to consider
Paying down student loans and saving
for retirement are competing priorities for many
workers, and focusing on one often comes
at the expense of the other.
Furthermore, we see that users who have
not yet paid off student loans tend to have lower
HelloWallet spending scores. As one aspect of
the composite HelloWallet Wellness score, users'
spending score evaluates the extent to which
users spend less than they earn on a consistent
basis and are able to save some of their income for
emergencies or other priorities. I found that
workers without student loans had spending
altering their benefits plans to better meet
their workers' needs with respect to paying down
student loans. K
Jake Spiegel is a senior research analyst with Morningstar.
He is based in Washington, D.C.
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