American college graduates have amassed a whopping $1 trillion1 in student loan debt – an obligation that promises to affect the ability of both Millennials and even Gen Xers to save for retirement for many years to come. In response, some employers are joining the federal government’s effort to help mitigate the impact of debt burdens on the financial lives of young (and not so young) people.
According to the Bureau of Labor Statistics, education loans have become the second-largest obligation of U.S. consumers after home mortgages. In addition to the near-term risks and consequences of default, loan obligations are influencing other consumer behavior including auto and home purchases as well as lifestyle decisions like marriage and reproduction.
Delaying Retirement Savings
Natixis Global Asset Management’s Durable Portfolio Construction Research Center has found that student loan debt is preventing one-third of Millennials (aged 18 to 33) from contributing to their company-sponsored retirement plan. Moreover, 41% of Gen Xers (aged 34 to 47) report that they do not participate in their company’s retirement plan because they have too much debt2. Investors who delay retirement savings are denying themselves the benefit of earning compound interest over time, which has the potential to help grow even small amounts of saved money into a larger retirement nest egg.
Lending A Hand To Graduates
In April 2016, the White House unveiled new measures aimed at helping Americans better manage their student debt. Through the Student Debt Challenge, the federal government hopes to enroll 2 million more borrowers in the Pay As You Earn (PAYE) plan. Passed into law in December 2012, PAYE offers holders of federal student loans the option to formulate a repayment plan based on their monthly discretionary income and family size. While PAYE was initially limited to specific loan programs and borrowers, eligibility has since been expanded to all borrowers who have received education loans from the federal government. Borrowers can now cap their monthly payments at no more than 10% of their income. Workers whose jobs qualify as public service – including teachers, nurses, non-profit employees, and state or federal government employees – become eligible for loan forgiveness after a repayment period of 10 years. There are approximately 5 million borrowers currently enrolled in the PAYE plan, but the White House is looking to businesses and educational institutions to help spread the word about the program to increase participation nationwide.
Focusing on Better Financial Lives
Natixis Global Asset Management recently announced a new student loan repayment benefit to help its associates mitigate the cost of their federal student loans. The benefit is an extension of the firm’s broader commitment to helping individuals maintain a confident but risk-aware approach to managing money.
Mounting student loan debt has enormous potential to cause adverse economic consequences in the near term and the years ahead, both nationally and for individuals opting to pay off loans at the expense of their retirement nest egg. Financial advisors can do their part making investors of all ages aware of federal programs and employer initiatives designed to create a smoother path for graduates who have transitioned from the classroom to the workforce. Furthermore, financial advisors who work with clients should educate investors on the value of establishing clear financial goals, prioritizing retirement savings, and undertaking a risk-conscious approach to markets.
More information about retirement planning and investor sentiment is available at durableportfolios.com. Additional information about the Student Loan Challenge is available here.
1 Ivanchev, Yavor. "Student loan debt: a deeper look." Bureau of Labor Statistics. December 2014. bls.gov.
2 Natixis Global Asset Management Survey of U.S. defined contribution plan participants, conducted by CoreData Research (August 2015). Survey included 1,000 U.S. workers, 750 being plan participants and 250 being non-participants.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
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