Americans have now piled up $1.5 trillion in student loan debt, and it’s having a huge impact on the financial situation of 43 to 45 million people saddled with an average student loan debt of $29,900 to $34,500, depending on whose numbers you go by.
It’s hurting their ability to contribute to a 401k. It’s hurting their ability to purchase a house. Pretty much you name a piece of the financial puzzle, and student loan debt trying to hide that piece from you.
More than two-thirds of recent college graduates carry student loan debt, which is now the second-largest debt category after mortgages, eclipsing credit card debt and auto loans.
On Oct. 15, Realtor.com released new data that found total student debt could buy every U.S. house on the market 1.9 times over. With students borrowing more and more money for college, Realtor.com notes the eventual effect is delayed home ownership as the average student loan borrower owes $34,500—$8,500 more than the typical 10% home down payment off $26,000.
“Student debt is already impacting borrowers’ ability to buy a home and education debt is expected to hamper consumers’ financial decisions for many years down the road,” says Realtor.com’s Senior Economist George Ratiu.
And as The Wall Street Journal pointed out in an Oct. 10 article, people with student loan debt usually get a late start on saving in a 401k plan as well. Citing figures from Boston College’s Center for Retirement Research, the WSJ piece says college graduates with student loans who were born between 1980 and 1984 had 50% less in their 401k plans by age 30 than peers without the loans.
Fifty percent!
Among the 45 million Americans with student loans, about 35% are age 40 or older, according to the Federal Reserve Bank of New York (which is also responsible for the $1.5 trillion total student loan debt figure).
At 15.1 million strong, Realtor.com says Millennials make up 34% of all student borrowers, with $498 billion in total debt across the generation, or about $33,000 per borrower.
A new Spectrem report on High-Income Millennials found that more than half of those earning more than $100,000 say their education-related debt prevents them from contributing as much as they would like to their 401k or other employer-sponsored retirement program.
But while student loan debt is a factor in the lives of many high-income Millennials, the study found they still place a higher value on saving for retirement than paying off student loans.
Employers looking to help
The WSJ piece focuses on a handful of companies that are trying to prevent younger workers from falling behind on retirement savings by matching their student loan repayments with contributions to a 401k plan.
One of them is Chattanooga, Tenn.-based insurer Unum, which earlier this year introduced a new benefit starting Jan. 1, 2020, that will allow employees to cash in up to five of their 28+ days off a year for student-loan repayments through the Student Debt Relief Program, managed by Fidelity Investments.
“Many people face the challenge of balancing student debt with planning for their financial futures,” said Carl Gagnon, assistant vice president of Global Financial Wellbeing and Retirement Programs at Unum, in a statement announcing the benefit. “This first-of-its-kind Student Debt Relief Program, along with a range of other financial benefits and resources, provides Unum employees more tools to reduce financial stress and improve overall wellbeing.”
The option is available to any U.S. Unum employee who has student debt, including parents who have taken out educational loans for their children.
While Unum’s benefit is new, they’re hardly the only ones rolling out programs to help employees pay down student loan debt to help them be able to save for retirement.
The WSJ piece notes 8% of the 2,763 employers the Society for Human Resource Management surveyed in April offered some sort of assistance with student loans, which is twice the 4% who did in 2018. According to a survey of 250 companies last year by the Employee Benefit Research Institute, 11% of employers offered student loan repayment subsidies and another 13% planned to add it.
Another company singled out in the Journal article is health technology company Abbott, which as of 2018 puts 5% of salary into the 401k account of any of its 29,000 U.S. employees who devote at least 2% of income to student loan payments. The worker doesn’t have to contribute to the 401k to get the money and must remain at Abbott for two years to keep it.
“We want to help employees get started on saving early. For every decade you wait to start saving for retirement, the rate you need to save for the rest of your life roughly doubles,” Mary Moreland, executive vice president of human resources at Abbott, tells the Journal.
About half of the 1,000 employees in the program were not contributing to the 401k, but now are saving due to the company contribution. Participants on average have $47,000 in student loans.
Government intervention possible
The article notes Congress is considering measures that would encourage more companies to offer these types of benefits. One proposal would allow companies to pay up to $5,250 annually toward employees’ student loans tax-free. Currently, workers must pay income tax on employers’ contributions.
Many of the Democratic presidential candidates have detailed plans to address the student loan debt issue.
Current frontrunner Sen. Elizabeth Warren (D-MA) has proposed forgiving $50,000 of student loan debt for those with household incomes less than $100,000 while people who earn between $100,000-$250,000 would be eligible for forgiveness on a sliding scale; the cancellation amount reduces by $1 for every $3 a person earns over $100,000. Those who earn more than $250,000 would not get any debt relief.
The plan would be funded by her wealth tax proposal, a 2% annual tax levied on accumulations of wealth exceeding $50 million, with an additional 1% levy on wealth exceeding $1 billion.
Joe Biden has proposed those who earn less than $30,000 a year will be off the hook from making their monthly loan payments, and borrowers on so-called “income driven repayment plans” would pay 5% of their discretionary income toward their student loans, instead of the 12%-20% they pay now.
Sen. Bernie Sanders (I-VT), plans to erase the country’s outstanding student loan tab with a $2.2 trillion plan that would be paid for by a new tax on financial transactions, including a 0.5% tax on stock transactions and a 0.1% tax on bond sales.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
