February’s issue of the Journal of Financial Planning included a flowchart I developed a few months ago to help guide clients through the rules around taking distributions from 529 Plans. Here is a link to the flowchart if you have questions about how 529 plans work.
Is Retirement Savings Being Crowded Out by Student Debt?
A recent study conducted by HelloWallet suggests that a dollar of student loan debt is associated with a 35-cent decrease in retirement account balances! That means, investors with lots of student loans are unable to save as much for retirement.
This is a big problem on a large scale:
- 60% of college graduates take on some form of student loan.
- The average loan size has tripled over two decades form $9,400 to $27,300
- There is more student loan debt than credit card debt.
I take issue with this study in several areas:
- The study assumes that people have a given number of dollars available and must split it between debt repayment and saving for retirement. In reality, I am seeing many people make significant sacrifices in their lifestyle in order to stay on top of their debts and retirement planning. People are living at home longer, avoiding more debt by not buying a house, or living a more modest lifestyle.
- People I see coming out of college with significant levels of debt are going through a crash course in personal finance much faster than those with no student loans. They are experiencing a wake-up call in their 20s and 30s as opposed to their 40’s or 50’s. Smart financial habits that they develop now could lead them to a more prosperous future.
- I’m working with many families on a more complicated dilemma. Not only do they need to weigh existing student loan debts and saving for retirement, but they also struggle to save for their own children’s education.
The final issue I take with this study is a line repeated multiple times: “There are few widely available tools to help individuals decide whether to prioritize student loan repayments or retirement savings.” In reality, there are lots of tools available to help people analyze that question, such as a Certified Financial Planner™ professional.