Financial footprint of student loan debt

Student loan debt is causing borrowers to put financial goals on hold, even as expanded forgiveness and repayment options offer help to some.

On Wednesday, the Department of Education published its plans to alter the regulations on debt collection for federal student loans, allowing it to waive balances for borrowers who owe more than they did when they began paying, those who attended for-profit technical schools that have been closed, and others. Those changes are in addition to actions the administration took last year to make public service loan forgiveness and income-driven repayment options more accessible and to implement its Save plan, which has reduced undergraduate loan payments to zero a month for 4.5 million people and to less than $100 for another 1 million.

Financial planner Ethan Miller, founder of Planning for Progress, said about half of his clients are financially affected by student loan debt. Many have benefited from the Save plan, including a 60-year-old rabbi who, after being in repayment for 15 years, had $55,000 forgiven, allowing her to pay off credit card debt and save for retirement, he said. Another, a 38-year-old educator, saw his loans forgiven and is now planning for a sabbatical and a move across the country with his husband, Miller said.

The recent $70 billion loan proposal by the Biden administration hasn’t changed anyone’s plans yet, however. Given that the first, wide-ranging forgiveness package Biden implemented was blocked last year by the Supreme Court and that the administration has now been sued by numerous Republican states over the current plan, “it really is a wait-and-see,” Miller said.

“I think we’ve all been burned,” he said, regarding the massive program that would have canceled $400 billion in loans.

The new proposal may not affect as many people he works with. “Somebody who has a ton of accrued interest, who would be helped most by the current announcement, would probably be eligible for forgiveness anyway,” Miller said.

INTERESTING TIMES

It's an unusual time to be a student loan borrower. Following a federal student loan payment pause that was extended eight times during the Covid-19 pandemic, payments resumed last September.

During the payment pause, advisors told InvestmentNews that clients took the opportunity to prioritize other financial goals, though many continued paying down their debt.

“A lot of my clients understand the importance of retirement savings,” Miller said. “Where the student loans really come into play is what are they able to do for cash savings and build a brokerage account or save for a downpayment on a house.”

Surveys leading up to the payment resumption showed that many, especially those who had never budgeted for payments, had little to no idea how they would be able to begin making payments.

Many people are confused, and others are angry that their loans are unlikely to be canceled, said Laurel Taylor, CEO of Candidly, a financial wellness platform. About 40 percent of borrowers didn't start making payments after the pause lifted in September, she noted. Some may be hoping that their loans will eventually be forgiven, and that any payments they make now would effectively be going nowhere.

“Because it’s been such a dynamic four years of twists and turns, there is overall just a massive amount of confusion on what users should be doing,” Taylor said. “There’s a hesitation to pay out right now because people don’t want to ‘waste’ their money… The biggest concern that I have with additional measures being proposed, is that it’s going to create more confusion, more hesitation for borrowers to pay.”

The Biden administration warned credit agencies late last year to avoid giving negative marks to borrowers who are behind on payments, at least until October 2024. Although that has no bearing on payments and balances, it is another factor that could discourage some from starting to make payments.

“It’s just a really difficult time for borrowers to navigate,” Taylor said. Her company, which provides student debt and savings guidance through AI, has seen demand ramp up dramatically since September, she said.

“What we’re seeing since the resumption of repayment is panic – that’s the best way of describing user behavior. We’ve seen a 460 percent increase in the utilization of our platform and a 260 percent increase in our coaching services,” she said.

In the two weeks since Biden’s announcement for additional proposed relief, logins to the site have increased twofold, Taylor said.

Through Save and the expanded income-driven repayment options, people have seen their monthly payments decrease by an average of $453, she said, based on data from Candidly's user base.

Of them, 36% have $0 payments, taking eight minutes on the company’s program to find out they are eligible, she said. The “vast remainder” of other users have seen their payments lowered to about $65 per month, she said.

WAITING GAME

In addition to numerous reports showing that student loan debt has negative effects on saving for retirement or short-term financial goals, recent data from the Lumina Foundation and Gallup show that more than 70 percent of students are already putting off major life events as a result of the loans they have yet to begin repaying.

The area most affected is home buying, with 29 percent of students and former students who didn't graduate saying they are delaying that because of debt, the survey of 14,000 people found.

Another 28 percent are avoiding buying cars, and 22 percent are waiting to move out of their parents’ homes. Twenty percent said they will put off starting businesses, and 15 percent are delaying when they will have children.

Additionally, research published this year by the Employee Benefit Research Institute and J.P. Morgan Asset Management found that student loan debt correlates with lower 401(k) plan contributions and account balances.

“Does it affect retirement readiness? Absolutely,” said Sharon Carson, retirement strategist at J.P. Morgan Asset Management.

Data collected prior to the student loan payment pause in 2020 showed that after people stopped paying off debt, a third increased their retirement plan contributions by a median of 2.5 percentage points. Conversely, when people began making payments, plan contributions dropped by a median of 2.7 percentage points for one in four people, Carson said.

She said missing the compound growth on that amount of savings could mean individuals have $175,000 less in their accounts when they retire.

The decreases in plan contributions were most common among people who were making higher-than-average contributions rates, suggesting that they continued to contribute enough to receive employer matches, Carson said.

Among those who had been at a company for less than five years, the average 401(k) balance was $62,000 for those without student loans and $46,000 for those with loans.

“We could see the differences in the plan balances,” she said. “It’s going to hurt the younger employees or the ones with the lowest tenure the most.”

Data from another firm, Fidelity, show that two-third of recent graduates with student loans are putting off retirement saving, getting married, buying a home, or other major life events.

“While the Department of Education is making strides with new repayment options and proposals of forgiveness, there is still a lot of uncertainty surrounding who and when borrowers may be eligible – adding to the mental stress student loan borrowers already face,” Jesse Moore, head of student debt at Fidelity Investments, said in a statement provided by the firm.

Before the student loan payment pause, about 30 percent of borrowers eligible for company retirement plans didn't participate in them, he said. About a quarter of workers carry student loan debt, with the average amount being $37,000, Moore said.

As part of the SECURE 2.0 Act, companies that provide 401(k) matches can do so for employees who don’t contribute to the plan but are making student loan payments.

“Plan sponsors really need to think about this. If they put in this provision, they could really encourage greater participation and increase retirement readiness for their employees,” Carson said.