Student Loan Debt Among Older Workers Impedes Retirement Savings

Millions of people aged 55 and above have outstanding student loans, significantly impacting how much they are able to save for retirement, analysis from the New School finds.

While mounting student loan debt is often seen as an issue for younger workers, more than 2.2 million people over the age of 55 have student loans, making it more difficult save for retirement.

Many policymakers and academics stress that student loans represent borrowers investing in themselves to increase lifetime earnings and wealth, but new research from the Schwartz Center for Economic Policy Analysis at the New School suggests that people over the age of 55 with outstanding student loans are unlikely to increase their lifetime wealth.

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More than 1.4 million workers and another 820,000 unemployed people, all aged 55 and above, have outstanding student loans attributed to either them or their spouses, according to data from the Federal Reserve Board’s 2022 Survey of Consumer Finance.

The Schwartz Center classified workers into three groups by earnings:

  • Bottom 50%: low-income, earn less than $54,600
  • Middle 40%: middle income, earn between $54,600 and $192,000
  • Top 10%: high income, earn more than $192,000

Student loans are described as potentially “good” debt because borrowers could potentially increase their lifetime earnings by obtaining a college degree paid for with student loans. However, Karthik Manickam, a Ph.D. student in the economics department at the New School for Social Research, said during a press briefing Wednesday that 50.3% of older workers with student debt are in the bottom half of income earners and average debt still owed is highest for the bottom half workers at around $

“If student debt worked as intended for older workers, we would expect higher income, …, so that despite having high a level of debt they would be able to repay their debts at a relatively manageable rate,” Manickam said, “However, the average amount of debt is actually highest for the bottom half of workers.”

Another issue the data revealed was that some workers do not benefit from their student loans because many have not completed their degrees. According to the findings, 15.3% of low-income, older workers and 20.3% of middle income, older workers with debt have not completed the degrees for which they took out loans. Conversely, all high-income earners have completed the degrees for which they borrowed.

With the issue of retirement security, older workers do not have decades of future potential work to pay of their loans that younger workers have.

“Lower income and middle-income older workers have the largest amount of debt and [may have to] make difficult decisions about whether to reduce their retirement savings or to work longer and delay retirement to repay their student loans,” Manickam said.

The Federal Reserve’s Survey of Consumer Finances found that workers aged 55 to 64 expect to take an average of nearly 11 years to repay their loans, while workers 65 and older will need 3.5 years to pay off their student debt, on average.

The high level of debt relative to income means borrowers have high repayment burdens—the ratio of amount owed to amount earned in a given period—which increases their risk of default, according to the Schwartz Center’s report. When a debtor defaults on a student loan, the loan becomes “delinquent,” which is one of the few conditions that trigger Social Security benefits to be garnished, thus reducing retirement income for the defaulted borrower.

To illustrate these impacts, Manickam gave an example of the hypothetical older worker, Chris, who lost his job due to the 2008 financial crisis. Chris was advised to enroll in a master’s degree program at a local college in order to re-skill himself and become competitive on the job market. To pursue the degree, Chris took out a combination of federal and private loans.

In 2024, Chris is 55 years old and earns the median income of $54,600. After a decade and a half of making minimum monthly repayments, he still has a debt of $50,000 at 4.3% interest.

To retire by age 65 without any student debt, Chris must repay his loan in nine years—requiring an annual repayment of $5,364. At this rate, Chris is spending on debt repayment an additional $60,386 in funds that otherwise could have gone toward his retirement.

Manickam explained that certain policy interventions, such as the Savings on a Valuable Education Plan and ending Social Security garnishment have the potential to help older workers save for retirement while also paying off their student loans.

The SAVE Plan, introduced by the Biden administration in 2023, provides for accelerated loan forgiveness and an income-driven repayment plan, which would help alleviate the harmful impact of loans on older workers. Under an income-driven repayment plan, debtors only need to make monthly repayments when their income rises above a certain threshold.

Additionally, in March, more than 30 members of Congress called on the Social Security Administration to end the garnishment of Social Security benefits to repay federal loans. This reform would help protect retirees and older workers who are already in financially precarious positions, according to the Schwartz Center.

Bechtel Faces ERISA Litigation Over Default Managed Accounts

The retirement plan committee for the engineering firm’s $5.1 billion plan is sued over the fees participants paid after being defaulted into managed accounts.

Engineering and construction firm Bechtel, its board and its trust and thrift plan committee have been sued for allegedly defaulting plan participants into managed accounts that was not justified for the fees.

Plaintiff Debra Hanigan, a current participant in the plan, filed the suit Friday seeking class-action status in the U.S. District Court for the Eastern District of Virginia, Alexandria Division. The suit, Hanigan v. Bechtel Global, is being led by law firm Fitzgerald Hanna & Sullivan PLLC along with Walcheske & Luzi LLC; the plaintiffs are seeking payment including “all profits which participants would have made if the defendants had fulfilled their fiduciary obligations.”

The allegations are of note as managed account use in retirement plans is seeing growth as plan sponsors seek to offer more personalized investing and advice in workplace plans. Proponents have made the case that managed accounts provide relatively low-cost access to personalized investing and advice access, though they are more often offered as an option and not a qualified default investment alternative for participants, according to data from Cerulli Associates.

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The plaintiff argued, however, that without participant engagement the managed accounts did not produce results worth the additional fees, particularly when target date funds could have provided similar results at a lower cost.

“Without additional personalization of information from Plan participants, managed accounts are essentially expensive target-date funds, focused on the single demographic factor of age,” the plaintiff alleged. “Prudent fiduciaries would not automatically enroll plan participants, who tend to be disengaged and do not provide additional personalized information to the recordkeeper, in an expensive MA program when much less expensive target-date funds for that purpose are readily available.”

The suit also argued that setting up the managed accounts as a QDIA “significantly and imprudently” increased the administrative fees paid to the recordkeeper from participants when compared to defaulting them into TDFs.

The managed accounts were run by Edelman Financial Engines as provided by recordkeeper Empower, according to the lawsuit. Neither was named as a defendant in the suit, nor did they immediately respond to requests for comment. Brechtel also did not respond to a request for a response.

Bechtel’s plan had $5.1 billion in assets as of 2022 as held by 15,508 participants, according to the lawsuit. Participants allegedly paid an average annual rate of $320 for recordkeeping, administrative and managed account fees, according to the suit. Without the managed account, fees would have been between $24 and $29, allegedly.

The plaintiff claimed that the “vast majority” of plan participants were defaulted into the managed account program during the class period without being asked for personal information to further customize the offering to their needs, and thus, “were enrolled in essentially very expensive and imprudent TDFs.”

“Plaintiff did not receive any in-person financial planning advice as part of her enrollment in the Empower managed account program during the Class Period,” according to the lawsuit.

The plaintiff also alleged that recordkeepers are “economically incentivized” to use managed accounts as they can charge higher fees, with Empower and Edelman Financial Engines allegedly earning “tens of millions of dollars” as participants lost “tens of millions of dollars.”

Proponents of managed accounts, including providers, have argued that the service can both improve investment outcomes as well as provide holistic financial guidance to participants who otherwise would not be able to afford a financial adviser.

In addition to recordkeepers, many plan sponsors and advisers are seeing value in managed accounts, with 52% of consultant-intermediated plans offering managed accounts, according to a recent white paper from Cerulli Associates. Among those, 5% use it as a dynamic QDIA, in which participants are defaulted into the service when they hit a certain age; 3% use it as the plan QDIA.

In 2020, Shell Oil Company was sued for allegedly allowing participants to be charged excessive fees in part for use of managed accounts provided by Fidelity Investments. Fidelity was not named as a defendant in the case, which this November was suggested for trial by a federal judge, according to court records.

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