Here’s actually some good news about student debt: borrowing by undergraduates is now declining.
Annual borrowing by all full-time undergraduates peaked at $6,122 per student in the 2009-10 academic year and fell to $5,490 by 2013-14, according to the Urban Institute’s new report, “Student Debt: Who Borrows Most? What Lies Ahead?”
For its shock value, the media toss around the $1.2 trillion figure – the total of all U.S. student loans outstanding. The institute provides a more refined look at student debt by diving into U.S. Department of Education data to learn who tends to borrow the most and why.
As a 20-something working in downtown Chicago in the 1980s, I spent every dime of my disposable income – and then some – on beer and Thai food, vacations, clothes, and parking tickets.
Fast forward 30 years, and my niece and nephew in Chicagoland are now graduating college. It’s liberating to leave school for a full-time job and a substantial increase in one’s income after years of penury. It’s also so tempting to squander this money.
But young adults no longer have that luxury.
The financial demands Millennials will face over their lifetimes are shaping up as far more complex than they were for their baby boomer parents, whose primary worry was buying a house. …Learn More
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
Americans once defined success mainly by whether they owned a house or were better off than their parents. Today, it’s a debt-free college education and a comfortable retirement.
U.S. adults feel that their top indicator of financial success is having enough money in the bank to retire (28 percent of adults), followed by sending their kids to college without having to borrow to pay for it (23 percent), according to a telephone survey sponsored by the American Institute of CPAs. Homeownership and upward mobility each came in at a distant 11 percent of the adults, age 18 and up, randomly surveyed by Harris Poll.
“No longer are homeownership and upward financial mobility the hallmarks of financial achievement,” said Ernie Almonte, chairman of the CPA Institute’s Financial Literacy Commission. “Americans have changed the benchmarks for their financial success.” …Learn More
New research finds that the people most likely to benefit from target date funds are also the people inclined to invest their 401(k)s in them – unsophisticated investors.
Retirement and financial literacy researchers long ago established the pitfalls of our nation’s do-it-yourself system of retirement saving (i.e., people don’t save at all or don’t save enough, and investing is too complex for most people). Target date funds (TDFs) have become an increasingly popular solution to the investment piece of the problem in the wake of the Pension Protection Act of 2006, which allowed employers to use them as the default investment option in defined contribution savings plans.
TDFs place a 401(k) participant’s accumulated savings into a broadly diversified portfolio of stocks and bonds that shifts the asset mix as they age. When employees are young and retirement is a distant concept, TDFs invest heavily – as much as 90 percent – in stocks. As employees age, a growing share goes into more conservative bonds.
TDFs are now the primary default investment among employers that automatically enroll new employees into their savings plans. TDFs are a good option not only for inexperienced investors but also for more experienced investors who prefer to delegate the task of portfolio rebalancing to their fund manager. However, employees typically have the option of transferring out of the TDF and selecting other investments offered in their plan. …Learn More
Some college graduates are so overburdened with student loan payments that they struggle just to stay afloat. But for those who can make their payments and even save some money, the logical next question might be: when can I buy a house?
This is a weighty question for 20-somethings new to the labor force and carrying unprecedented levels of student debt, which puts them at greater financial risk than previous generations of graduates. Squared Away asked two financial planners from the sensible Midwest – Danielle Schultz and Mark Zoril – to help young adults work through the difficult financial tradeoffs they’ll face as they juggle student loan and car payments, retirement saving, and homeownership.
Here’s their advice:
Danielle L. Schultz, a financial planner in suburban Chicago, believes buying a house should be a 20-something’s lowest priority.
The highest priorities are building up an emergency fund and contributing regularly to an employer’s retirement savings plan. The minimum emergency fund for a young, healthy adult who earns, say, $36,000, is around $6,000 – $10,000 would be better. [The standard emergency fund equals at least three months of necessary living expenses, excluding splurges like vacations or restaurant meals with friends.]
Schultz feels strongly about the emergency fund, especially if buying property is the goal. When something goes wrong – a car accident, a job loss, a house fire – renters “can always move in with mom and dad or a friend, but when you’ve got a mortgage, it’s not easy to get out of,” she said. Schultz also is not wild about real estate as an investment, since property values aren’t rising appreciably in many areas.
After the emergency fund is established, it’s wise to knock down the student debt first by paying off the loans with the highest interest rates, she said. Many graduates have multiple loans, so don’t sweat the loans with interest rates at, say, 2 percent – that’s effectively “free money” when inflation is running at 2 percent. …Learn More
Anger, frustration, confusion, and regret – high emotion permeates the nearly 8,500 complaints about student loans posted last year on the Consumer Financial Protection Bureau (CFPB) website.
A college education can pay dividends in the form of higher lifetime earnings and more opportunities, and millions of graduates repay their loans without incident. But many of the one in three borrowers facing extreme difficulty with repayment have legitimate reasons. The job market, while improving, is not robust for recent graduates. And interest rates on student loans are higher than mortgage rates, so the amount of debt accumulated – and the monthly payments – can be substantial.
Borrowers report that lenders and the firms hired by lenders to service customers are often unwilling to renegotiate monthly payments or devise ways to work down the principal. “I wish that with what I know now I never would have gotten these loans for college,” said one borrower’s online complaint.
The CFPB last month requested detailed information from lenders and servicing firms about customers’ options for modifying loans or negotiating more affordable loan payments. Customers receive “very little information or help when they get in trouble,” CFPB said.
Future borrowers beware. Here’s a sampling of the complaints about lenders:
• No flexibility.
• Refinancing may one day be possible – but not now.
• “Bureaucratic nightmare.”
Unfortunately, private lenders are not under the same obligations as the federal government to show flexibility in renegotiating federally funded loans; for example, the government forgives loans for some public workers or offers payment plans that take into account graduates’ incomes for those who don’t earn enough to meet their loan payments.
So before taking out student loans, consult the CFPB consumer guide, which recommends exhausting all federal loans before resorting to private loans.
The issues raised in the complaints detailed below sound similar to subprime borrowers’ experiences with loan servicing firms. …Learn More