The financial fallout of student loans can last into retirement.
People with student loans participate in employer-sponsored retirement plans at a lower rate than those without debt, according to a new survey by human resources consulting firm Aon Hewitt.
Aon Hewitt found that 71 percent of employees who had student loans contributed to workplace retirement plans, such as 401(k)s, compared with 77 percent of employees without debt. The margin of error was 2 percentage points.
When they do contribute, employees with student debt tend to save less for retirement than those who don't have loans.
The drag on retirement plan contributions from student loans can be significant.
The most common matching contribution employers give to a retirement plan is 6 percent of an employee's salary. Workers receive that match if they commit that percentage of their pay to the plan.
However, more than half of workers with student loans invest 5 percent or less of their salaries into a workplace retirement plan.
With a contribution of 5 percent or less, some workers with student debt may be missing out on the employer match, said Heather Tredup, a partner and retirement best practice leader at Aon Hewitt.
The small differences in plan contributions can add up over a lifetime.
Take this example: A 30-year-old worker saving only 4 percent of pay because of her student loans will have accumulated a 401(k) plan balance of $351,407 at age 65, assuming matching employer contributions, a 2 percent raise every year and an annualized 6 percent in investment returns.
If the same worker saved 6 percent of their salary, she would have a balance of $527,110. That's the difference of more than $175,703.
"The contributions lost to student loans are detrimental to retirement savings, especially for millennials," Tredup said.
Yet it's not just a problem for younger workers.
Forty-four percent of millennial employees, 26 percent of Gen Xers and 13 percent of baby boomers have student loans, according to Aon Hewitt, which surveyed more than 2,000 people at U.S. companies with 1,000 workers or more.
Roughly half of the workers with student debt Aon surveyed were paying at least $3,000 per year on their loans.
While it makes senses to contribute up to the employer match in a retirement plan because that is essentially free money, figuring out what to do with your extra savings after that depends on your appetite for risk and comfort with debt.
Most financial advisors expect U.S. stocks to return less than 6 percent annually after inflation.
Because expected returns are so low, it makes sense for many people to pay off their student loans before contributing more to their retirement savings beyond the employer match, said David Blanchett, head of retirement research for Morningstar Investment Management.
"Most people are just happier without student loans hanging over their heads," Blanchett said. "Given lower expected returns in U.S. stocks and bonds, paying down debt may give them a better return than what they would get in the market."