Money in the Media #5

Student Loan Debt: The Multigenerational Effects on Relationships and Retirement

In this week’s Money in the Media Monday, I’m taking a look at the TIAA article “Student Loan Debt: The Multigenerational Effects on Relationships and Retirement.” This TIAA and MIT Agelab study brings to light the domino effect student loans are having on the personal finances of American adults.

Domino Effect

For many who have been affected by student loans, it will come as no surprise that 84% of American adults state that their retirement savings are affected by their student loans. It can be difficult and intimidating to even consider retirement savings when there is such a large balance keeping you in the red.

To break down that 84% even farther: Of those saving for retirement, 73% said that their student loans were preventing them from maxing out their retirement accounts. While 26% of those who are not saving for retirement said that they haven’t started due to their student loans. How do these percentages manifest themselves in terms of real world consequences?

Delaying Important Milestones

I can personally speak to this as Kayla and I specifically held off on starting to try for children until we had paid off all of our consumer and student debts. However, to the contrary of this, we did not wait to buy a home as our first home is a rental property that helped us to supercharge our debt payoff. Of course, we are just one data point in the millions of affected families.

Overall, this is proof that sound financial reasoning is prevailing now in those who have student debts. Meaning that many are not willing to take on more debt just to “keep up with the Jones.” Unsurprisingly, as the amount of student loans increase, the impact of this payment will increase proportionately.

What to do in this situation? Take the time to evaluate priorities in terms of paying off the loans versus moving ahead with costly life plans. For example, Kayla and I decided not to wait for our wedding until after our debts were paid off. This decision wasn’t based on the math, but on our priorities and values. Going into this, we knew the consequences would be paying more in interest as we extended our payoff date, but were willing to move ahead anyway in order to get married.

I recommend running your numbers to see what you can afford in order to accomplish the goals to meet the timeline that you want. The extra cost in interest may be worth it to you depending on your personal situation and your goals.

Preventing Contributions to Retirement Vehicles

The impact of student loans on retirement savings in some cases is not just the problem of the student. Many parents and grandparents have taken out loans for their children and grandchildren as well. Of them, 43% say that they will increase their retirement savings once the loans are paid off. This delay in savings could greatly impact the amount they will have at retirement age as shown below:

As retirement savings are pushed back, the necessary savings amount increases exponentially. To prevent the need for catch-up contributions, I would recommend contributing to an employer based 401k/403b or IRA plan up to the employer match or 5% if there is no match. This will initiate the habit of saving for retirement without greatly varying take home pay. Changing money from after tax to before tax will decrease the amount paid in taxes overall, making the difference in pay even smaller than 5%.

Notably, taking advantage of any employer match will create an automatic 100% return on investment, which far outpaces the interest on student loans.

Causing Rifts in Romantic relationships

According to TIAA, 40% of borrowers with loans for themselves and 36% of borrowers with loans for a child or grandchild report never speaking with their family about their student loans. This proves that there is a lack of communication even within families when it comes to student loans.

Even worse, 36% of those currently contributing to their partner’s student loans said that their current contribution amount was not clear from the beginning. The lack of communication as it relates to finances is the number one reason for divorce. In creating a plan for how to build a life together as a couple, airing dirty financial laundry is part of the process and can help build the relationship as the problem is faced together.

I had actually paid off my student loans prior to meeting my wife, however, Kayla still had thousands in loans left when we got married in 2017. At first, she attempted to shield me from the responsibility of paying for her past. After some time, I was able to convince her that if we tackled the debts together, we could pay them off years faster and then move on to other goals and dreams. We’ve planned our finances as a team ever since.

Eliminating Options

The chart above lists only some of the ways that student loans can affect available options in the future. The need to keep a hated job or stay in an underwater mortgage can also be affected by the student loan payments that must be met every month.

In working to eliminate these loans, it is helpful to scrutinize every line item of the budget to see if it passes the question “Does this expense push me closer to my goals or provide real value to my life?” Answering this question can free up the wiggle room to put more towards paying off debts and provide yourself with more options, sooner.

Financial security and debt freedom opens up these options to better pursue a life you deserve and to take care of those around you, whether that means childcare costs, caregiver costs, their own college costs or something else entirely. Even if the path is long (it took us 8 years to go from college graduation to debt freedom), the end result will be well worth the effort.

Don’t let the fear of the time it will take to accomplish something stand in the way of your doing it. The time will pass anyway.

Earl Nightingale

Wrap It Up!

While student loans may be unavoidable at this point, there are ways to prevent them from creating a domino effect through the rest of your life.

• Evaluate budget priorities in comparison with goals and timelines.
• Use these goals to dictate how money is spent.
• Try saving up to an employer match or 5% in a 401k/403b or IRA.
• Air dirty debt laundry to your partner/spouse to ensure that everyone is on the same page before planning your lives together.
• Keep working to create wiggle room in your budget to open up options in the future by paying off the loans as quickly as possible.

How have your student loans affected your life? How are you working to pay them off AND achieve your current goals? Let me know in the comments below!