The Potential Consequences of High Student Loan Debt
By Kay Anderson, CFP®
As we head into summer, a new class of students is throwing on a cap and gown and leaving high school for the last time. It is an exciting time as many of these graduates embark on their next adventures as college undergraduates. Aside from the financial benefits, a college degree can provide highly valuable skills with a lifetime of benefits and is often critical to success in today’s workforce.
The obstacle many students face is the high-cost of education. According to the Federal Reserve, the national student loan debt reached $1.5 trillion, doubling in the last decade. In 2018, 69 percent of students took out loans, graduating with an average debt of $26,800 with interest rates between 5.00 – 7.4%.
Student loan debt can create many long term difficulties for both students and their families. At one point, a college degree allowed graduates to earn gainful employment, an income of their own, and living arrangements independent of their family. Today, many students graduate with a 30 year loan with payments above the cost of their rent. Many graduates have to rely on their families for housing and support even after finding employment. In certain areas of the country, such as New York City and Miami, as many as 45 percent of post-graduates have to move back in with their parents.
On the other side of the spectrum, the debt could prevent many individuals from being able to care for aging family members. Baby Boomers and older Generation X make up the largest portion of today’s potential care recipients. They are also the parents and grandparents of one of the most indebted generations. Over the next 10-15 years, the rate of potential care recipients is expected to rise to 84 percent. The rate of available caregivers is only expected to be 13 percent. For many, there comes a point where children may need to provide more care for their parents. However, the pressure of paying off staggering student loan interest and fees could create an obstacle when trying to provide care.
No one enjoys paying a large bill, but at least there is no physical harm, right? It turns out there could be. A study by Northwestern University linked high student debt to high blood pressure and metabolic problems as well as poor overall mental and physical health. The stress and financial strain from trying to keep up with payments could lead many to develop poor sleep patterns, dietary choices, and self-care habits. These factors combined could lead to serious health problems such as Type II Diabetes, heart disease, some cancers, and depression.
Money often becomes a point of contention at some point in many relationships. Starting out a marriage with substantial debt, whether it is one or both partners with the debt, can make planning for the future difficult. A lack of disposable income could prevent couples from saving for a home or retirement. A recent survey conducted by Student Loan Hero discovered that 13 percent of divorcees blame student loans specifically for ending their relationship. With the rate of student loan debt continuing to climb, it is possible more relationships will be affected.
Despite its high cost, a college degree has been shown to be one of the most effective ways to increase wage earning potential. The Chronicle of Higher Education estimates an earnings gap of more than $32,000 per year between peers who earn a bachelor’s degree and those with only a high school diploma. This could result in a lifetime total income of nearly $1.4 million more than a non-degreed individual.
Parents and grandparents may consider alleviating some of the financial burden by establishing a 529 college savings plan when children are young. These tax-advantaged savings accounts grow tax free when used for any qualified education expenses including tuition, room & board, books, computer and supplies. The plan can be created with a minimal investment of $250 and once established, any family member or friend can contribute. An individual may gift up to $15,000/year ($30,000 annually for married couples) without gift tax consequences.
A special exception applies to 529 plans. The “five-year rule” allows for a one-time, lump-sum contribution of five years’ worth of annual exclusions. As of 2019, an individual may contribute up to $75,000 ($150,000 for married couples). A gift tax return is required to be filed for informational purposes.
Personal time, attention, and love are the greatest gifts that you can give any child, grandchild, or family member. However, should you be in a position to generously help to reduce the financial impact on the future goals of a loved one, there can be no greater gift than the opportunity for them to achieve a great education….it is a gift that keeps on giving!
Consider your options, plan well in advance of the need, and contact your advisor to provide details on how you may begin funding a 529 plan.
Sources:
Student Loan Averages
College Degree Statistics
College Students Moving in With Parents
Rate of Caregivers
Student Loans and Health
Student Loans and Divorce Rate
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