Student Loan Debt a Major Threat

August 15, 2014

I read this article about student loan debt resulting in a portion of a man’s Social Security income being garnished. In the article, not only is the garnishment discussed but also discussed is the growing trend of older Americans still having outstanding student loan debt. If that debt is not repaid prior to retirement, Social Security payments may be impacted and the retirement lifestyle that you’re expecting may come up short. It reminded me of a couple of situations I’ve encountered in coaching sessions recently where student loan debt became a central part of the conversation.

First, I met with a new hire at a large company who graduated last May and has her first full time job. During our conversation, she mentioned that she is having trouble making ends meet and is holding on till the end of her current apartment lease before moving back into her parents’ house.  Why?

She went to a relatively expensive private college in Massachusetts and graduated with over $100,000 in student loan debt and a degree in psychology.  With her degree, she had trouble finding a job in her field and believes that she needs a graduate degree to find employment in her major field of study.  But she can’t imagine committing to another round of student loan debt given the level of debt she has today.

One of the saddest things I’ve heard in a meeting was something she said toward the end of our session.  She said that had she realized the impact of her school choice on her future loan repayments and how many years it would take to pay off the loans, she would have made a different decision about what school to attend or what to declare as her major.  She wishes now that someone in her family or a friend had worked to dissuade her from her choice of an expensive school and a major without significant income potential.

The next example is a conversation I had just about an hour before writing this.  I talked with a man who is receiving an inheritance from a family member who left a fairly large sum to him in his will.  We talked about what he could do with the money and his initial thought was to invest in the stock market to try to maximize the return on that money. We talked about carving out an emergency fund, investing, his attitudes/risk tolerance/return expectations, and paying down debt.

I am not certain what he will do. He made no decisions during our conversation. Investing in the stock market at today’s high levels and with lots of flashpoints in the world that could erupt in violence that rattles world markets – on top of lackluster economic growth across the globe – seemed a bit less like the way he will head. Paying down debt was the last thing on his mind but given that he works for a company that routinely lays off people in his business unit and he now has a higher income and a shorter time before retiring than many of his peers, that may be rising up on his list of things to do with the inheritance.  He is concerned about losing his job and the potential of defaulting on his loans (paid for 4 kids to get through college and has a lot of PLUS Loans outstanding) if he is unemployed and the stock market doing a 2008 rerun scares him a bit.

Student loan debt across America has reached all time record high levels, over $1 TRILLION in total.  This is a massive threat to the long term financial security of many people.  What can you do to make sure that you don’t have to deal with this in the future?

• Help your children make informed decisions about school choice so that they don’t end up like the young lady I met recently who is in deeper debt than she could have ever imagined and will take decades to pay it off.
• Live well below your means so that you have enough disposable income to aggressively pay off your loans.
• Make debt pay down your top financial priority after getting your emergency fund in place.

The long term implications could be a devastating blow to your retirement planning efforts if you allow student loan debt to remain in your life long after you’ve forgotten most of what you learned for your final exams.