The Strain of Student Debt on Long-Term Financial Goals

New research from the MissionSquare Research Institute highlights a growing issue for employees carrying student loan debt: its significant impact on retirement savings and financial planning. The study, which surveyed more than 2,000 public and private sector workers, shows that employees saddled with student loans are prioritizing short-term financial needs over long-term wealth-building efforts.

The data reveals that many employees with student debt either aren’t investing at all or are opting for low-risk, short-term investments. In the public sector, 34% of workers with student loans report not investing, compared to 26% in the private sector. Among those who do invest, 29% of public sector employees and 36% of private sector employees are focused on short-term investments that typically offer lower long-term returns. The research attributes this behavior to the borrowers' need for liquidity, as they prioritize paying off debt over securing future financial growth.

Short-Term Planning Takes Priority Over Retirement Savings

One of the most concerning findings of the report is that employees with student debt tend to defer long-term financial goals, particularly retirement planning. Instead, many focus on more immediate financial needs, leading to short-term planning horizons. The study shows that these individuals are more likely to prioritize short-term needs, such as paying bills or addressing debt, rather than planning for the next five or ten years.

This shift in focus has a direct impact on retirement savings. The research found that employees burdened by student debt are more likely to feel they aren't saving enough for retirement. Specifically, public sector workers with student loans were 14% more likely to agree they should be saving more for retirement, while private sector workers were 9% more likely to share this concern. A key barrier cited by these workers was affordability, with 73% of public sector employees and 70% of private sector employees identifying cost as a major obstacle to saving for retirement.

For many, the burden of student debt itself is a primary challenge to saving for the future. Among public sector workers with student loans, 54% identified excessive debt as a key factor holding them back from contributing to retirement savings, compared to 47% in the private sector. Competing saving priorities and a lack of clarity on how to begin saving for retirement were also major hurdles. Only 6% of public sector employees and 7% of private sector employees reported being unsure how to start saving for retirement, showing that there is a basic understanding of the importance of retirement savings, but a lack of resources to begin.

The Wider Impact of the Student Debt Crisis

As the student debt crisis continues to shape financial behaviors, it’s important to consider the broader landscape. Under the Biden administration, significant efforts have been made to address student loan debt, including debt forgiveness programs that have helped millions of borrowers. Before leaving office, President Biden touted his administration’s student loan relief efforts, claiming that more than $180 billion in debt was canceled for over 5 million borrowers.

The overall student loan debt in the U.S. now exceeds $1.7 trillion, with around 43 million borrowers facing this burden. In 2024, Biden's policies focused on expanding loan forgiveness, with the implementation of the Saving on a Valuable Education (SAVE) plan. This plan, which caps loan payments at 5% of discretionary income for certain borrowers, has already enrolled 4.5 million individuals by early 2025. Other initiatives, such as the Fresh Start Initiative, have helped millions of borrowers in default regain good standing.

Despite these efforts, the future of student loan relief remains uncertain. The Trump administration, while not making any specific promises regarding student debt relief, has generally taken a less proactive stance on tackling the crisis. During his campaign, former President Trump criticized his predecessor’s student debt forgiveness programs, calling them “vile.” However, his administration did take some measures to assist borrowers during the COVID-19 pandemic, including temporarily freezing student loan repayments and interest.

Moving Forward: The Need for Long-Term Solutions

The challenge of student loan debt is far from solved, and its ongoing impact on retirement savings and financial planning is clear. As more employees find themselves in debt, it is crucial for policymakers to find long-term solutions that can reduce the financial strain on borrowers. While temporary relief measures, such as those implemented under the Biden administration, are beneficial, they may not be enough to reverse the trend of under-saving for retirement.

For many workers, especially those with student debt, focusing on long-term financial planning becomes a daunting task. Addressing the systemic issues surrounding student loans, along with improving financial literacy and planning resources for all employees, will be essential steps in ensuring that future generations can achieve long-term financial stability.