Student Loans Are Eating Into 401(k)s, Especially For Workers In Their 40s

The retirement drag from student loans is real and it lingers

If you still owe on student loans, your 401(k) likely shows it. The Employee Benefit Research Institute says borrowers trail non borrowers on retirement balances at every age, with the steepest gap for people in their 40s, where the median is about 45% lower than for debt free peers. The through line is simple: while loan payments go out, retirement contributions often shrink or stop. Those missed years compound, while peers who never borrowed tend to start earlier and contribute more.

"The percentage of individuals having student debt is much larger than it was 20 years ago, as is the amount of that debt," Craig Copeland - EBRI's head of wealth benefits research and the report's author - said. "This financial roadblock is reducing savings in a material way and that appears to last until retirement."

The footprint of student loans across the workforce is big. Among 401(k) participants ages 25 to 69, about 20% still owe student loans. For the 25 to 29 group, that rises to 35.7%. Younger workers with loans also enroll in plans less often when eligible: 75.5% participation versus more than 84% for those without loans.

Bigger balances, tighter budgets

Household budgets are juggling more line items. EBRI notes that pricier groceries, fuel, housing, and health coverage are all vying against retirement contributions. At the same time, student loan delinquencies are rising and repayment programs have become less forgiving. As of June 30, the Federal Reserve Bank of New York tallied $1.65 trillion in student debt, up 26% from the same quarter in 2016.

The tradeoffs show up in people's lives. Joanne Lee, 36, finished school in 2012 and, while paying about $250 a month toward her loans, could only contribute to her 401(k) up to the employer match. Extra cash went to her debt.

She tapped her account early to assist a relative and was juggling credit-card balances. About two years ago she finished paying roughly $60,000 in student loans and is now trying to make up ground, contributing 8% of her paycheck with plans to raise that. "If I had contributed that $250 to my retirement account instead of my student loans, or the money that I was trying to repay back from my credit-card debt into my 401(k), then I'd be pretty set for retirement age," she said. "Student loan debt is a really big burden, but it's also the only way for the majority of people in the US to get a proper education."

A new way to get the match, and who is using it

Beginning in 2024, Secure 2.0 lets qualified student loan payments count toward an employer's 401(k) match. EBRI modeled what broad employer uptake could do and estimated an additional $11.2 billion to $20.2 billion a year in matching contributions, depending on whether companies match at 4% or 6%. It's improbable every company will add this feature, yet a number of employers already have.

Fidelity's numbers show the gap this aims to address. Among workers carrying student loans, the average nest egg was 30% smaller for people 50 and up and 20% smaller for those ages 18 to 49. Since the 2024 launch of Fidelity's student loan matching feature, more than 200 companies have implemented it, covering 1.8 million eligible workers, and employers have, in total, put $60 million into retirement plans for employees. By early 2026, employees receiving matches tied to loan payments had received employer contributions averaging $1,900 since 2024.

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One beneficiary is Taylor Vest, 32, who completed an MBA in 2024 and owes more than $200,000 in student loans. When she joined a management consulting firm later that year, she learned her company would contribute a match equal to as much as 6% of pay tied to her loan payments. That translated into more than $10,000 going into her 401(k) in 2025. "It felt surprising that an employer would just give you $10,000 or whatever your 6% match is," she said.

Vest now qualifies for a bonus reaching up to 20% of base pay, and that's enabling her to fully fund her 401(k) in 2026. Her monthly loan bill is about $2,000 and she expects to finish paying in 2036. She also moved from Charlottesville, Virginia to San Diego, California, which is a higher cost city. "It is just great to have the opportunity to have the benefit if something were to change," she said. "If you're making payments to your student loans, there should never be a year where your contributions are zero."

Adoption has been gradual, but the incentive to offer this benefit is rising, said EBRI's Copeland: "Now that stronger enforcement of student loan payments has started since the forbearance of payments has ended, the incentive to offer this benefit has grown from when it was first available."

More ways employers are pitching in, and what it means for you

Some firms are tackling balances directly. Fidelity provides its employees as much as $15,000 to pay down student loan principal for full-time staff and half that amount for part-timers. Direct repayment support like this shows up more often than match-on-loan arrangements, because those programs are harder to run.

Any program that lightens student debt can ease financial pressure at every age. And parents are keen to keep their kids from landing in the same spot. In a recent Fidelity survey of more than 2,000 families, 74% named saving for a child's education as the top financial goal, ahead of saving for retirement at 61%.

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