March 18, 2021

Retirees Who Tested Well Added More Debt

A new study finds that debt burdens have grown for older workers and retirees in recent decades. But this isn’t the first research to reach that conclusion.

What is new is whose debt burden is increasing the most: the people who score higher on simple memory and math tests.

Across the three age groups the researchers examined – 56-61, 62-67, and 68-73 – the high scorers on the cognitive tests were more likely to have debts exceeding half of their assets in 2014 than the high scorers who were the same ages back in 1998.

They also added disproportionately more mortgage debt than people with lower cognition during the study’s time frame, a period when house prices were rising.

The upshot of this study is that people who have retained more of their memory and facility with numbers are “more financially fragile” than the high scorers were in the past, the University of Southern California researchers said.

The findings run counter to a common belief that financial companies in recent years have had more success selling their increasingly complex products to unwitting borrowers – a belief perhaps fostered by the subprime mortgages targeted to risky borrowers in the mid-2000s that triggered the global financial collapse.

The share of the older people in the study who were carrying debt increased between 1998 and 2014 regardless of their cognitive ability. The biggest jump occurred after 62 – a popular retirement age pegged to Social Security eligibility.

The heart of the analysis, however, is exploring the connection between cognitive ability and financial vulnerability. The researchers found the opposite of what one might expect: debt problems have loomed larger over time for those with higher scores on survey questions testing word recall and cognitive ability using simple subtraction and backward-counting exercises. …
Learn More

February 4, 2021

CARES Act’s Loan Forbearance is Working

As the pandemic was sinking into our collective consciousness a year ago, Congress, fearing economic calamity, allowed Americans to temporarily halt their mortgage and student loan payments.

By the end of October – seven months after President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act – Americans had postponed some $43 billion in debt, including car loans and credit cards, which many lenders deferred voluntarily. Billions more are still being added to the total amount in forbearance.

Fast action in Congress “resulted in substantial financial relief for households,” says a new study by researchers at some of the nation’s top business schools. Their recent analysis found that the assistance went where it was needed – to “financially vulnerable borrowers living in regions that experienced the highest COVID-19 infection rates and the greatest deterioration in their economic conditions.”

When lenders grant forbearance they agree to waive their customers’ debt payments for a specified period of time. For example, Congress said borrowers could request that their payments on federally backed mortgages be deferred by six months to a year.

Although forbearance was less visible than the checks taxpayers also received under the CARES Act, the financial lift was equally potent. Customers who received loan forbearance saved an average of $3,200 just on their mortgages last year – this compares with $3,400 in stimulus checks for a family of four.

Congress also automatically suspended all payments on federal student loans, saving borrowers an average $140 last year, and President Biden has just extended the forbearance until at least Oct. 1. Lenders, in an attempt to prevent massive loan defaults on their books, voluntarily gave consumers a break last year on two types of loans that weren’t part of the CARES Act: automobile loans ($430 saved) and credit cards ($70 saved).

Forbearance is only temporary relief, because the missed payments will eventually have to be made up. But in a telling indication that borrowers didn’t want to fall behind, just a third of the people who asked for debt relief actually used it. In these cases, forbearance “acts as a credit line” borrowers can draw on – if they really need it. …Learn More