Many workers increased their retirement contributions during the three years that payments were suspended. According to the Q2 2023 retirement report from Fidelity Investments, however, that pattern will change, at least for some, in the fall as the monthly payments are due and employees must reprioritize their budgets.
Retirement is among the first savings objectives to experience the effects of those changes, according to Jesse Moore, head of student debt at Fidelity Investments, in an email to Fortune.
Households with little financial flexibility will need to find the money someplace, and that usually means sacrificing substantial retirement savings. Fidelity previously discovered that since the COVID-era payment freeze started in March 2020, the proportion of borrowers donating at least 5% of their earnings to their 401(k)s increased from 63% to 72%. During the hiatus, there was a decline in the percentage of people using their 401(k)s as a source of loans, a symptom of financial difficulty.
Young workers have made substantial progress toward their retirement contributions because of this. According to Fidelity’s Q2 research, which examined the more than 45 million retirement accounts it handles, Gen Z witnessed a 66% gain in average 401(k) balances compared to a year ago, while millennials saw a 24.5% increase. Similar trends have been identified in other reports: Compared to previous generations, younger generations now make a larger contribution. When payments start in October, which Jeffries estimates to be around $400 per month, the enhanced retirement contributions will probably be reduced. According to study, employees who have student loans—regardless of the amount owed—save much less than those who do not.
Recently graduated students will “certainly be highly impacted,” according to Moore. 65% of recent college grads whose federal student loan payments are presently on hold, according to a second Fidelity research released earlier this month, “have no idea how they are going to start repaying their student loans once the emergency pause is lifted.” Similar numbers claim that they are unable to participate in important financial milestones like saving for retirement or getting married because of their debt. These young professionals are coping with the rising prices of everything from food to housing while having less financial support than earlier generations. Additionally, on average, they take on more student debt than their older counterparts (baby boomers have the highest average sums due to compound interest).
According to Moore, “this is an issue that is going to affect all age groups,” though. “People of all ages are facing higher costs, and adding yet another expense will make saving for retirement difficult,” says the report. “This is true whether you are carrying debt for your own education or that of a child.” Additionally, Moore predicts that the more than 40 million people who will soon have bills due may face severe financial difficulties, which is worse than not being able to prepare for retirement. That might have even more negative effects on retirement accounts, which employees may use as a last choice in dire situations.
Once payments on student loans start coming in again, Moore says it will be crucial to monitor the rates for 401(k) loans among borrowers. These borrowers “may revert to a pattern of saving less and withdrawing at a higher rate,” in addition to having fewer options to turn to in trying times.
The borrower has a few possibilities.
The SECURE Act 2.0, which was passed into law late last year, will allow companies to make matched contributions into retirement accounts for workers who are making student loan payments beginning in 2024, even though employees may not be able to contribute as much themselves.
People with financial difficulties have a few options. They can choose to sign up for an income-driven repayment plan, such as the brand-new SAVE plan, which can reduce payments to as little as $0 monthly. Borrowers can enroll in that plan right away.
Finally, they may wait a little longer to start repaying their college debts. From October 1, 2023, to September 30, 2024, borrowers will have a one-year grace period during which missed payments won’t be reported to credit bureaus and they won’t be deemed overdue if they don’t pay. In addition, interest will continue to accrue but won’t capitalize—that is, it won’t be applied to the principal—on outstanding sums.
One area that can suffer once the payments resume in the fall is retirement savings. Some analysts have warned that the economy would soon face a “cliff” related to student loan debt, which will result in less spending overall.
Although savings APYs are at historic highs, most Americans are still underinvesting. View Fortune Recommends’ list of the top high-yield savings accounts and CD rates.
