Should you pay off student loans or save for retirement? The scary reason you must do both

It's not just a small fringe of people who have had their financial lives turned upside down because of student debt: A new study suggests there can be lifelong consequences for indebted graduates, even years after they've paid off education loans.

Specifically, by the time you're 65, student loans may have lifted more than $175,000 out of your retirement account, according to a new study by the insurance and human resources company Aon Hewitt.

That is because, the research suggests, loans seem to prevent young workers from contributing to savings for their old age. 

Those burdened by student debt tend to contribute to employer-provided retirement plans like 401(k)s at a lower rate than debt-free workers: 71% compared to 77%, according to Aon Hewitt's study. And more than half of workers with student loans contribute 5% or less of their paycheck to their account.

That's not enough money.

Aon Hewitt compared two theoretical 30 year olds making $30,000 a year in salary, getting yearly raises of 2%, and earning average investment returns of 6% — the only difference between the two was how much of each paycheck they filed away. One saved 6% and one saved 4%. 

By the time they were 65, the person who saved 6% had more than $527,000 stashed away to retire. The person who saved 4% had less than $352,000: a difference of more than $175,000. For some, that might mean five years of retirement funding — gone.

The findings reveal a complicated problem, which might partly have to do with "temporal discounting": It's hard to worry more about money you'll need in 30 years when there's a huge loan balance looming over you right now.

And it's not only employees who suffer the consequences of high education debt; it can weigh on employers as well, Heather Tredup, a partner at Aon Hewitt, said.

"Stress and financial stress also gets brought into the workforce and that can impact productivity," she said. 

Plus, when older workers who would prefer to retire are forced to keep working, that can be bad for everyone.

"If your employees are able to save for retirement that means they will be more prepared and better prepared when the times comes," Tredup said. If they can't? "You start to have people staying in the workforce who maybe would have retired, and that creates problems with succession and things like that."

One solution, she said, is for employers to realize that helping their employees save for retirement from the get-go is crucial. Programs like 401(k) matching are prevalent, Tredup said, but employer benefits related to student loan repayments are relatively new and rare.

Employers may also need to provide better financial education. After all, when you've got student loans it's hard to make extra room in your budget to save. And, unfortunately, when it comes to the classic "pay down debt or invest first" dilemma, there's not always a clear answer. 

Some financial advisors say it's important to start investing in your retirement account even if you're also paying off debt. Then again, if you've got very high-interest loans, then the payoff to focusing on that debt may be bigger.

Certainly, there are spending tricks and saving hacks you can use to help free up extra cash and reduce expenses on bills. You might also take a look at student loan refinancing, which can save you thousands of dollars.  

And finally, there's a nugget of hope: While it's true that few employers provide student loan perks as part of worker benefits packages — only 4% offer them, according to a recent study — that number is on the rise.