How Student Debt Impacts Home Ownership and Retirement

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What about housing wealth?

Despite all the complexities of investing and the machinations of the financial markets, there are only three main ways to build wealth for the average American: Through home ownership, by creating a portfolio and by savings.

Of these, the one with the largest, most consistent and common payoff is home ownership.

That’s why any weakening of the long-touted dream of people owning their own home is critical to the long-term abilities of working people to become part of American society and share in its financial potential.  Home ownership is also the main way to secure retirement assets.

Yet due to the 2007 recession that severely reduced home equity for millions of Americans, a main engine to wealth management was seriously damaged.  And that damage is still not repaired.

Home ownership is getting more unattainable or undesirable.
Home ownership is getting more unattainable or undesirable.

Consider the results of a new survey of 30,000 renters by Apartment List that looked at the connection between student debt and home ownership.

The study found that 51% of millennial college graduates in Los Angeles have student debt. 47% pay at least $300 each month.  It also found that college graduates without student debt save $330 a month for a down payment, compared to $230 for graduates with student debt. Millennials without a degree save $170 a month.

The negative impact of student debt on Millennials without a college degree found they needed 29 years to save for a 20% down payment on a home in Los Angeles.  Waiting 29 years for anything is a dream, so this is especially bad news for the building industry that must be constantly aware of the risks of recessions, interest rate hikes, changes in local demographics, and building booms.  Now, they can add student debt loads to their list of serious risks.

Student Debt Hurts Investment Contribution Levels

Of course, student debt obligation has become a national political issue, so investment advisors should understand its scope and impact.

According to the site, StudentLoanHero, Americans owe nearly $1.3 trillion in student loan debt, spread out among about 43 million borrowers. The average Class of 2016 graduate has $37,172 in student loan debt, up 6% from last year. But the numbers also include loans in default, forbearance, default and repayment.

The loans cannot be dismissed via bankruptcy, plus the loan rates are high. The 2015 rate for a direct unsubsidized loan to undergraduates is 4.66% and 6.21% for an unsubsidized loan to graduate students, according to US News & World Report. But this does not cover loans from private lenders who have been criticized for excessive profiting from the loans.

Worse, for student pursuing advanced degree, their loans also pose a significant risk to their ability to buy a house after they graduate.  Consider these loan amounts for advanced degrees courtesy of StudentLoanHero:

About 40% of the $1 trillion student loan debt was used to finance graduate and professional degrees.

Combined undergraduate and graduate debt by degree:

MBA = $42,000 (11% of graduate degrees)

Master of Education = $50,879 (16%)

Master of Science = $50,400 (18%)

Master of Arts = $58,539 (8%)

Law = $140,616 (4%)

Medicine and health sciences = $161,772 (5%)

The Bottom Line

So the bottom line is that student loan debt impact both the ability to buy a house and build an investment portfolio. Combined, these two huge personal burdens are contributing to the U.S. retirement crisis.

While many politicians and top executives in the financial services industry want to deny or downplay the retirement crisis, this is something attentive financial advisors will see every day in their practices. Worse, there is very little they can do to correct the situation.

 

 

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Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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