Another uniquely American financial ill: student loan debt, will further exacerbate America’s retirement crisis.

Many workers have used the suspension of payments for the past three years to boost their retirement benefits. But that trend is set to reverse, at least for some, in the fall once monthly payments come due and workers have to re-prioritize their budgets, it said. Fidelity Investments Second Quarter 2023 Retirement Report.

“Retirement is one of the first savings goals to feel the impact of these shifts,” said Jesse Moore, director of student debt at Fidelity Investments. wealth in an email. Families that already have little financial wiggle room will need to make up that money somewhere, often at the expense of strong retirement savings.

Fidelity previously found that since the COVID-era payment freeze began in March 2020, the percentage of borrowers who put at least 5% of their paychecks into their 401(k) plans has risen from 63% to 72%. 401(k)s (signs of financial hardship) also decreased during the pause.

That’s why younger workers have made major strides in superannuation contributions. According to Fidelity’s second-quarter report, which analyzed more than 45 million retirement accounts it manages, the average 401(k) balance of Gen Z is up 66 percent from a year ago, while the average balance of millennials is up up 24.5%. Other reports have found similar trends: Today’s youth contribute more than older generations at a similar age.

Jeffries said the increased pension contributions will likely be reduced once contributions resume, averaging around $400 a month in October. In fact, The study found Employees with student loans (regardless of the size of their balances) had significantly lower savings than those without debt.

New graduates “are definitely going to be very impacted,” Moore said. A separate fidelity report A report released earlier this month found that 65 percent of recent college graduates whose federal student loan payments are currently on hold “do not know how they will begin paying their student loans once the emergency moratorium is lifted.” Similar people said their loans Holds them back from participating in financial milestones, such as saving for retirement or getting married.

These younger workers have less economic buffer than older generations while dealing with rising costs of everything from food to housing. On average, they carry more student debt than their older counterparts (boomers have the largest average balances due to compounding interest).

That said, “this is a problem that will affect all ages,” Moore said. “Whether you’re taking on debt for yourself or your children’s education, people of all ages are facing higher costs, and adding another expense will make saving for retirement a challenge.”

While not being able to save for retirement is bad enough, Moore predicts that the more than 40 million people whose payments are due will face other financial challenges. That could have a bigger impact on retirement accounts, which workers may turn to as a last resort in an emergency.

“Once payments resume, it will be important to watch 401(k) loan rates for student loan borrowers,” Moore said. “Not only do these borrowers have fewer options to choose from during times of hardship, but they also risk falling into a pattern of lower savings and higher withdrawal rates.”

Borrowers have some options

While workers themselves may not be able to contribute as much, thanks to the SAFE Act 2.0 signed into law late last year, employers will be able to contribute to the retirement accounts of employees who pay student loans starting in 2024.

Those struggling to make payments have several options.They can choose to participate in income-driven repayment plans such as New SAVE program, which can reduce monthly payments to as low as $0. Borrowers can now enroll in the program.

And, as a last resort, they can defer student loan payments for a while. The Biden administration announced a one-year grace period for borrowers, from October 1, 2023, to September 30, 2024, during which late payments will not be reported to credit bureaus, and borrowers who do not will not be considered in arrears. pay.In addition, interest will still accrue on the balance, but not capitalizedwhich means it will not be added to the body.

Retirement savings is just one area that could be affected once payments start back up in the fall. Some experts predict a looming “cliff” from student loans to the economy, leading to less spending in other areas.

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