Student Debt Burdens Non-Grads More

Cover of bookThe share of college students who must borrow to pay for their education has surged over the past decade. Average borrowing per student is also much higher than it was in 2004, though there’s evidence it might now be in decline.

Only now is serious research trickling in about the personal financial fallout from the nation’s $1 trillion-plus in student debt outstanding. But one new study reaches an interesting conclusion about the burden of student debt: it “is much greater among non-completers than among those who obtain a college degree.” One reason is that they can’t expect to earn the higher income that a degree confers on a graduate.

The study – part of an edited volume published by the W.E. Upjohn Institute for Employment Research, “Student Loans and the Dynamics of Debt” – gauged the debt’s impact on various measures of personal financial stability, including the likelihoods of filing for bankruptcy protection and buying a house.

The researchers first analyzed a broad sample of U.S. households over age 29, controlling for income and other demographic characteristics. They found some negative impact as student debt levels rise, but this effect was “not particularly strong.”

However, there was a large impact on the financial stability of a subgroup of borrowers who had not completed their degrees. The personal finances of these “non-completers,” as the study called them, are “particularly susceptible to being burdened by student debt.”…Learn More

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Workers See Regular, Roth 401ks as Same

Due to differing tax treatments, each $1,000 placed into a traditional, tax-deductible 401(k) costs less today than $1,000 placed into a Roth 401(k), but that Roth will provide more money in retirement.

New research indicates that workers don’t recognize this difference between the two types of employer-sponsored retirement accounts when deciding how much to save.

A $1,000 contribution to a traditional 401(k) costs the worker less than $1,000 in take-home pay, because the income tax hit on the $1,000 will be delayed until the money is withdrawn from the account. But a $1,000 contribution to a Roth 401(k) costs exactly $1,000 in take-home pay, because the worker has to pay income taxes on it up front. The Roth funds, including the investment returns, will not be taxed when they’re withdrawn.

A Roth 401(k) might be thought of as shifting additional money into the future, allowing people to spend and consume more in retirement. (This assumes the same tax rate over a worker’s lifetime.)

The upshot: to get a set amount of after-tax money for retirement, workers could contribute less to a Roth than to a traditional 401(k). But that’s not what they do. …Learn More

Annuities: Useful but Little Understood

What makes a man tick

The general public is very cool on annuities. But many economists like the idea of retirees using some portion of their savings to buy them.

Annuities, with their fixed monthly payments, may be the best way to ensure retirees’ savings last just as long as they do. Otherwise, they may either spend it too fast and deplete their savings prematurely or spend too conservatively, depriving themselves of necessities in their old age.

New research suggests that one reason retirees don’t buy annuities is because they have great difficulty figuring out what they’re worth. When they try to figure this out, they bump up against their own cognitive limitations – limitations that only worsen with age.

In the study, 2,210 adults over age 18 were asked to estimate the value of a monthly annuity familiar to most workers: Social Security benefits. First, the research subjects were asked if they would pay $20,000 to “buy” a $100 increase in their monthly Social Security benefits. If the person said no, the survey repeated the question with a lower amount, eventually zeroing in on what this additional $100 benefit was worth to them. Next, the research subjects were asked to reduce – or “sell” – their monthly benefits by $100 in return for a specific dollar amount paid to them upfront.

In theory, the buy and sell prices they finally arrived at should be equal. But there was an enormous gap between the two. The median price research subjects were willing to pay was $3,000, and the median price at which they would sell was $13,750. There was also a wide range of sales prices among the individual participants: some would accept $1,500 or less, while others wanted $200,000 or more. …Learn More

states

Financial Ed in Schools Sometimes Works

There’s little agreement on whether personal finance education in the schools is effective, but success with financial education mandates in Georgia, Idaho, and Texas indicates that it is.

A new study compared thousands of young adults in these states, which have fairly rigorous mandates, with states lacking personal finance education. This focus on states with very strong mandates departs from prior studies that lumped together numerous states with varying levels of mandates. The researchers also looked at whether behavior actually improved – credit scores and loan delinquencies – rather than simply testing students’ knowledge before and after they took the classes.

The three states studied have extensive financial education programs. Curricula in Georgia cover economics, financial institutions, saving, insurance, credit, and investing. Idaho requires a full semester of economics, with intensive personal financial instruction. In Texas, all high school students are required to delve into topics ranging from the rent-vs-buy decision and planning for retirement to personal bankruptcy.

The study assessed the impact of this education on credit scores once the students graduated high school and on whether they successfully avoided poor financial behaviors, such as falling into delinquency on their car loans. Young adults in Georgia, Idaho, and Texas were compared with young adults in the same state before the mandates, as well as people in other states with similar demographics but no mandates. …Learn More

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Will Boomers Delay Social Security?

A 1983 reform to Social Security is now in full swing for baby boomers: they must wait at least until their 66th birthday to claim their full pension benefits.

But is the gradual increase in the program’s so-called full retirement age – it was 65 for prior generations – having any effect on when boomers retire?

Why people decide to retire when they do is complicated, and economists have tried for years to understand this.  Americans are working slightly longer than they did in the mid-1990s, with the average retirement age rising from 62 to 64 for men and from 60 to 62 for women (though this trend may be stalling). Myriad possible explanations for retiring later include the decline of traditional pensions, greater longevity, healthier older workers, and a more educated labor force.

Another reason could be the 1983 reform delaying the age at which baby boomers in this country are allowed to claim their full Social Security pensions, a reason supported by a new study of similar reforms to Switzerland’s government pensions.

The researchers found that a one-year increase in Switzerland’s full retirement age, or FRA, for women is associated with a half-year delay in when women retire and when they claim their full government pensions. …Learn More

Procrastinators Are Not Big Savers

The Greek poet Hesiod, circa 700 B.C.

Saving for retirement is a modern-day imperative, but even the ancient Greek poet Hesiod – quoted in a new study – advised us not to tarry:

Do not put off till tomorrow and the day after; for a sluggish worker does not fill his barn.

So what about procrastinators, who place more importance on today’s enjoyment than on preparing for the future?  The new study asked whether people with this personality trait make different decisions about retirement saving than non-procrastinators and found that they do.

Up to one in five people were procrastinators in the study’s data base of more than 155,000 workers at numerous employers.  The researchers identified procrastinators in the sample as the people who waited until the final day of open enrollment to choose their health plan from among their employer options.  (To separate them from employees who intentionally delayed so they could collect enough information, the researchers looked at how often people used various online employee benefit tools – these strategic delayers were very active; procrastinators were not.) …Learn More

Immigrant Flows Impact Social Security

Manuel Carvallo immigrated from Mexico at age 40 and became a U.S. citizen at 51.  The Georgia pension consultant just reached another milestone, accumulating the 10 years of U.S. work experience required to receive a small Social Security pension when he retires.

Chart: Changing Tide of Mexican Immigrants

Millions of immigrants from around the world who work here illegally could get the same opportunity as Carvallo under President Obama’s executive actions on immigration, which propose to give many of them temporary legal work papers and Social Security numbers.  Great uncertainty remains about where U.S. immigration policy is heading as Congress actively seeks to reverse the president’s administrative actions

What is clear is that when undocumented immigrants – farm workers, hotel workers, and household and restaurant staff lacking green cards or other legal status – do pay into Social Security, they often have little prospect of ever receiving benefits.  In 2010, some 3 million such workers with fake or expired Social Security numbers added a $12 billion bonus to the Social Security Trust Fund, the U.S. Social Security Administration estimated. …Learn More

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