When it comes time for young people to make decisions about higher education, creating a sufficient retirement fund probably isn’t first on their list of priorities, but the findings of a recent working paper suggest it would be wise to at least consider it .
Clinical professors Frank Smith and Ajay K. Aggarwal used U.S. government data and a mathematical model they developed to track how college debt and college area of study might affect the retirement outcomes of Millennial couples. What they found isn’t exactly encouraging for the average student loan borrower — or for most college majors analyzed, for that matter.
The researchers published their study online and submitted it to the Journal of the Academy of Business and Economics in December. It’s part of a series of studies the couple collaborated on while teaching at Henderson State University to investigate the success of U.S. couples in achieving a comfortable retirement, Smith says.
How Student Loan Debt Affects Retiring Millennials
Millennials are famous for the financial choices they have made over the past two decades.
Born roughly between 1981 and 1996, those who pursued higher education did so at a time when tuition and fee prices were rising. In the 2018-2019 school year – when the youngest millennials would have graduated from four-year colleges if they had enrolled at age 18 – the average in-state tuition and fees for four-year public institutions was about three times higher than of last year. 1988-1989 school year, according to College Board data.
Many older millennials faced the double whammy of graduating with exorbitant student loan debt during the Great Recession, then inheriting the crippled job market that followed in the years that followed. If you face slowing wage growth and skyrocketing costs of living, you will have a generation with quite a few barriers to saving money.
A four-year degree, at least in theory, is a way to unlock more career opportunities and income over time, hopefully enough to save for the future and retire comfortably. But millennials’ student loans may make that prospect unrealistic for many of them, according to Smith and Aggarwal.
“Debt is the most important factor overall in determining whether a family will have enough savings for retirement,” Smith says of the findings.
Researchers calculated that Millennial couples need a nest egg of at least $290,000 by age 65 to retire comfortably, assuming they live to about 80. With a student debt level of $20,000, the odds of a matched Millennial family reaching that goal were about 50/50.
For comparison, U.S. students who graduated in the 2021-2022 academic year had an average of $29,400 in educational debt, according to the College Board. (FYI: That’s lower than the $33,200 average for 2011-2012 graduates and the $34,000 average for 2016-2017 graduates.)
With a debt level of around $40,000, only 2 in 5 Millennial graduates will be able to reach the minimum savings needed to feel comfortable in retirement. At $80,000, this value drops to 1 in 4, according to Smith and Aggarwal’s analysis.
University majors and success in retirement saving
To assess which college majors had the best chance of reaching the $290,000 threshold by age 65, Smith and Aggarwal examined annualized salary data from Payscale and the National Association of Colleges and Employers, dividing them into five specialty categories: medicine and life sciences; visual and performing arts; engineering and technology; liberal arts; and business.
That said, the analysis included 45 unique majors, and the researchers determined that 60% of them will not reach the minimum nest egg goal, even if they have no student loan debt. Across all majors, Millennial graduates would need a starting salary of at least $48,500 to get there on time.
“Majors that give you a higher starting salary have a huge impact,” Smith says.
It may not be surprising that all engineering and technology majors were determined to have starting salaries high enough to retire comfortably with both $0 and $20,000 debt levels. About half of the majors in the business category could reach the minimum debt-free retirement goal, but none could reach the $40,000 debt threshold.
In medicine and life sciences, the analysis found that only starting pay for nurses and pharmacies meets that minimum. Nurses could have about $20,000 in debt – but no more than $39,999 – and still retire comfortably at 65. Pharmacy graduates fared best in terms of retirement success, with Smith and Aggarwal finding that those graduates could owe up to $80,000 in debt and still have debt. 50/50 chance you won’t outlive your retirement savings.
Then there were majors in the visual and performing arts and liberal arts categories, which had a particularly bleak outlook: No one was predicted to achieve sufficient retirement savings, even debt-free at graduation.
Will Millennials ever be able to retire?
Smith and Aggarwal’s findings may give the impression that a large swath of millennial graduates will work until they die, but remember that their research doesn’t take into account every single set of circumstances. In fact, both researchers say that with strategic planning, building a large enough retirement nest egg is very achievable for many people.
“That’s not what it means [non-STEM and business] degrees are definitely not worth it. Degrees open doors,” Smith says. “It’s more like the Ghost of Christmas Future showing you what could be, but doesn’t have to be.”
There is research to support that, in general, having a college degree is better than not having one, the authors note in the study. A Pew Research Center report shows that college graduates earned $1 million more than their peers with only a high school diploma during their working years, and their average annual income was $17,500 higher. Bureau of Labor Statistics data supports that the median difference is at least equal, according to Smith and Aggarwal.
What is perhaps most important, however, especially for those working in low-income sectors, is living within your means. Avoiding high-interest debt, such as credit cards, is especially important for graduates in lower-paying fields, he adds.
A potential turning point for student loan borrowers also arrived this year thanks to SECURE 2.0, a broad set of retirement laws that aims to strengthen Americans’ ability to grow their personal savings. Employers now have the option to match borrowers’ student loan payments as contributions to a tax-deferred retirement plan, allowing workers with education debt to save simply by paying their student loan bills on time.
With 84% of borrowers saying student loans affect their ability to save, according to a recent Fidelity survey, this benefit in U.S. workplaces could completely change the trajectory of their retirement outcomes, if it’s adopted on a broad scale.
Meanwhile, an employer-sponsored defined contribution plan like the 401(k), Aggarwal says, is still one of the most critical tools workers can use to grow a retirement fund, even if they contribute small amounts. Industry-specific benefits, like teacher pensions, can also make a huge difference when it comes to retirement.
“I think if people sat down and really did the basic math, they would realize that the employer contribution to their pension is something they should take seriously,” he says. “It will have a huge impact on their bottom line.”
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