Student loan debt crisis
Reshma Kapadia wrote a solid article in Barron’s last week titled, How Your Kids Can Ruin Your Retirement — and How to Make Sure They Don’t. This story resonated with me because I work with a number of clients that have set goals to delay retirement into their late 60’s so that they can help pay down their children’s college debt. There are now more than 44 million parents and students who owe collectively over $1.5 trillion in education debt. This is about $521 billion more than the total U.S. credit card debt and $400 billion in U.S. auto loan debt. This election season, I expect that the debate over student loans is going to heat up.
Senator Bernie Sanders is championing the cause with this plan called College for All Act to Eliminate Undergraduate Tuition at 4-year Public Colleges and Universities. This legislation would provide $47 billion per year to states to eliminate undergraduate tuition and fees at public colleges and universities. I may not agree with much of Senator Sanders socialist agenda, but I do agree with helping students to re-finance their loans into more reasonable rates. I have reviewed many student loan statements and have seen students with frightful interest rates as high as 10%. The average student loan has interest rates between 6-7%. It’s no wonder why 70% of parents surveyed by T. Rowe Price said they would be willing to delay retirement to pay for college. Many of their children can’t even pay off the interest alone never mind the principal. I have one client with a child that graduated with $180,000 in debt and the interest in the last few years has increased the outstanding balance to $210,000.
Two stats in Reshma’s Barron’s article did not surprise me at all. The first was that nearly 80% of parents give some financial support to their adult children—to the tune of $500 billion a year, according to estimates by consulting firm Age Wave. That’s twice what parents put into retirement accounts, according to a 2018 survey from Bank of America Merrill Lynch and Age Wave. The second was that about 15% of 25- to 35-year-olds were living at home in 2016, based on a Pew Research report. That’s five percentage points higher than the share of Generation Xers living at home when they were the same age, and almost double the share of today’s older retirees who were in the same situation years ago. (source: Barron’s, Reshma Kapadia)
This article was written from the parent’s perspective. If it was written from the child’s perspective, Reshma would have likely highlighted how more young adults do not have enough money to afford a mortgage or how they are delaying marriage or putting off having babies.
U.S. Department of Education Secretary Betsy Devos says that student loan debt is now a crisis. The average student in the Class of 2017 has almost $40,000 in student loan debt. DeVos raised a “red warning flag” that student loan debt is crippling students, federal taxpayers and stealing from future generations. I’d take it one step further and predict that if student debt triples again, massive amounts of student debt could possibly trigger an economic slowdown.
I’m sure this topic touched many of you reading who have adult children. I recognize that most of my retired clients greatest accomplishment was helping to put their children through college and how they sacrificed a large part of their own retirement savings to achieve this meaningful goal.
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