The Ripple Effect of Student Debt

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The Ripple Effect of Student Debt

Nov, 28th 2016

Nearly 41 million Americans are opening a letter or logging in to connect with their student debt loan servicer with one question in mind, “Was it worth it?” The financial stability for many of these Americans are about as strong as a college freshman’s knees on the first day of class, shaky at best. Unfortunately, the student debt crisis has become a national financial issue and some analysts are concerned for the future of our economy. There are four areas I will focus on showing a ripple effect the student debt crisis is dramatically affecting; Marriage, Having Kids, Home Purchasing, and Retirement. These four elements are critical to a growing economy and with a major generation in the Baby Boomers retiring, and entitlements on the line, it will now be up to the Millennial generation to backfill the American Economy.

Marriage:

Financial health has historically been a demonstration of a person’s ability to care for themselves. This ultimately leads to self confidence and the risk of asking another person to spend the rest of their lives with them. When insecurity seeps into the psyche and the doubt of being attractive due to financial burden takes hold, a person is less likely to be prepared to make the next move in a relationship. The result is a generationally change in perception of marriage and timing.  “The average age for a marriage in the United States has gone up significantly over the last few decades. In 1965, the average age for marriage was 23 years old for men and 21 years old for women. Today, that average has gone up by six years to 29 years old for men and 27 years old for women. “One of the reasons for this higher marriage age is the inability of young people to meet the financial milestones Kiplinger’s outlines, such as paying student loans, starting an emergency fund, and starting to save for retirement in a timely way.” – asa.org  

The delay in marriage does have an ultimate effect which is a person then becomes monetary centric. If the resounding thought of financial security first, then marriage second takes hold, the foundation of marriage is based upon finances.  As sociologist Mary Elizabeth Hughes points out, “One of the leading explanations for this trend points to a series of economic transformations that has made attaining economic security more difficult for many and impossible for some. From this perspective, marriage is being delayed—and even for gone— because inauspicious economic context prevents individuals from reaching the minimum economic threshold required for marriage.” In addition, “culturally, young adults have increasingly come to see marriage as a ‘capstone’ rather than a ‘cornerstone’—that is, something they do after they have all other ducks in a row, rather than a foundation for launching into adulthood and parenthood.

As a result, marriage is taking a backseat largely in part to student debt. Those with student debt are less likely to be searching for a partner rather focused on the monkey on their back… or in their mail/inbox.

Having Kids

If marriage is delayed, then certainly having kids will be delayed. Who wants to have a baby, which trust me is not a blimp in the quick-books adjustments, while paying off student debt? Having children are definitely a blessing, but also require a much higher standard of security when it comes to the bank account. In terms of long term financial security, having children relatively early and not delayed can prevent the “sandwich generation.”

“As with delays in marriage, delays in childbearing can provide economic benefits to some demographic groups more than others—particularly college-educated women. However, one of the biggest economic risks these borrowers face is that by delaying marriage and children, they run the risk of pushing their parents into the “sandwich generation” and being forced into it themselves down the road. The “sandwich generation” is the generation of adults who find themselves with the financial and emotional burden of caring for both aging parents and growing children at the same time. In fact, today, 47% of adults age 40 to 59 have a parent 65 years or older AND are either raising a young child or financially supporting a child 18 years or older. About 15% of 40 to 59 year olds are providing financial support to both an aging parent and a child.” – asa.org

Home Ownership

Another major life altering move is the purchase of a home, the American Dream. The gain of equity and a place to hang your hat is a game changer for most. For one, the purchase of a home adds to one’s self worth, mentally and of course financially. If an entire generation of people with student debt are reconsidering the purchase of a home, the country is in for an economic shift.

“Young people have it bad. Student loan debt is one reason. The burden has tripled over the past decade, with recent graduates carrying an average of $29,000. A survey we completed in mid-June found that 71 percent of graduates who are responsibly paying back their loans are delaying their home purchase by five years because of their debt.” – realtormag.com

Home ownership is a main contributor to the overall wealth portfolio of many Americans. As principle compounds and equity grows, a delay in ownership could be estimated at thousands if not hundreds of thousands for an individual. As with many of the 41 million who now contribute their paycheck to their shackling debt, they can’t fathom a day when homeownership is possible. "Along with rent, a car payment and other large monthly expenses that can squeeze a household's budget, paying a few hundred dollars every month on a student loan equates to thousands of dollars over several years that could otherwise go towards saving for a home purchase." Lawrence Yun, the Realtors' chief economist. –cnbc.com

Retirement

When given the opportunity to participate in a 401k or just cash, a majority of the 41 million with debt will choose the latter. Retirement to so far out of the mind frame of a millennial, when the time comes for this generation to “hang it up” we will be presented with the same crisis which created Social Security. It’s unfortunate, but student debt has pushed all financial resources to solving the issue now rather then later.

“Beyond paying for everyday necessities, many strapped with student debt are putting off saving for later in life. In fact, 73% of those responding to ASA’s survey said they have put off saving for retirement or other investments because of their student loans.” –asa.org

Politicians are now approaching the idea of providing employers the ability to provide company match payments to employee’s student debt tax free. When this bill passes, it can be expected most people will move all their resources from their 401k contribution to dealing with the debt already accumulated. Again, further delaying the inevitable of building for retirement.

In the end, if all things remain the same, we are going to be single cat/dog people living in our parent’s basement, waiting for them to deed the house over (so no reverse mortgages please!) Although likely, we do have an opportunity to steer the ship in a different direction today if we focused our attention on changing student debt law. Currently student debt stands in a position exempt from the bankruptcy courts, further eliminating options for people. I am confident in saying, a vast majority of the 41 million want to pay their loans back, but do need a life line thrown overboard to help the drowning. Bankruptcy needs to be an option to allow settlement to occur, otherwise no progress can be made due to all the leverage being in the debt holders hand. Student debt is playing seven two off suit while loan servicers have pocket Aces. Lets get some more cards on the table!

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