2023-08-18 22:58:16
As Gen Xers near retirement and their oldest members are just four years away from being able to start collecting their Social Security, the retirement plans of these Americans could be disrupted by debt, especially since the pause in paying off student loans is coming to an end.
Generation X is considered to be those born between approximately 1965 and 1980, which means that the oldest members are 58 years old, only a year or more away from being able to withdraw retirement funds without penalty, and less than a decade from being able to access to Medicare.
In the first quarter of this year, Gen Xers held about a quarter of the nation’s $1.6 trillion of outstanding student loan debt, worth nearly $49,000 per borrower, according to TransUnion, the credit bureau. And this fall, borrowers will have to start paying off those balances all over again. Starting in September, the loans will accrue interest again and payments will be due in October, for the first time since March 2020.
For people like Renita Thompson of Washington, DC, the fast-approaching deadline makes planning for the future more difficult. Thompson, 51, is pursuing a bachelor’s degree in human resource management and owes between $75,000 and $80,000 in a mix of federal and private student loans.
Thompson said she was able to use the three-year break on student loan payments to pay off some other debt. He recounted that taking a debt management program with a credit counseling organization, GreenPath, allowed him to pay off about $15,000 of credit card debt.
“I think when I get the degree it will increase my salary,” says Thompson. But he figured he still had another three to four years to pay off the rest of his student loans. “I’m doing it, but not as fast as I thought,” he said. “I wish I’d thought of this sooner, since I’m getting older.”
Trent Graham, financial adviser for GreenPath, commented that this is a common predicament. “In general, we’ve seen clients who are more focused on savings and not focused on those student loans,” he explained. “In fact, they didn’t have a plan to deal with those student loans.”
Higher university cost, less pension
Generation X faces a daunting confluence of socioeconomic trends. In the workplace, these employees were the first for whom defined contribution retirement plans such as 401(k)s began to replace defined benefit pensions.
“The biggest change is that this makes it more difficult to save for retirement,” says Tyler Bond, director of research at the National Institute on Retirement Security, a nonprofit research and policy organization. “When you think about the impact of student loan debt on retirement savings, this is where this intersection begins,” he noted.
Gen Xers enrolled in college at a time when the cost of higher education broke a decades-old pattern of stability. Data from the Department of Education’s National Center for Education Statistics show that, adjusted for inflation, college enrollment was flat through much of the 1970s and even declined in some years, but in the early 1980s (just when older Gen Xers started graduating from high school) those costs started to climb and haven’t stopped.
Studies have found evidence that student loan debt can hurt the amount people save for retirement. In 2018, researchers at Boston College’s Center for Retirement Research found that while student debt didn’t deter young adults from opening a 401(k), it did affect their contributions to that account.
An annual study by Northwestern Mutual found that 55 percent of Gen Xers didn’t think they would be financially ready for retirement.
Christian Mitchell, director of customer service for Northwestern Mutual, said these borrowers were faced with unattractive choices: work longer or live with less when they retire.
“Retirement is theoretical until it ceases to be,” he commented. “Maybe what aggravates it in this case is all the economic turmoil we’ve had in recent years,” she added. For a generation in their peak-earning years, the interruption of that momentum, when millions of jobs were lost during the pandemic, can create a financial shortfall from which it can be difficult to recover.
The reality is that some of these borrowers are likely to have to work longer and live more frugally, especially since student loans, unlike other types of unsecured debt like credit cards and medical debt, they cannot be easily forgiven in bankruptcy.
Juggling your children’s expenses and your own
Gen Xers generally already had considerable debt: Online lending platform LendingTree found that this age group had the highest mortgage and other debt, averaging more than $167,000 per borrower. The higher interest rates that debtors pay today, due to the Federal Reserve’s fight against inflation, makes it difficult to pay down debts that have variable interest rates, since more of each monthly payment goes to to servicing the debt itself, rather than repaying the principal.
“It has a bigger impact on their overall budget, which means they have a harder time covering other expenses,” Graham said.
The burden of student debt threatens to exacerbate existing income and wealth inequality in American society, as these borrowers must choose between paying the cost of their own education or saving for their own children’s college expenses.
Terrell Grant, a health professional who runs a home care agency in Sacramento, California, contributes to a 529 account to help finance college for his two sons, ages 12 and 10, even though he has two jobs to pay off the nearly $110,000 she borrowed to earn bachelor’s and master’s degrees.
Grant, 40, the first in his family to graduate from college, says he doesn’t regret investing in his education, but acknowledges that he has had to recalibrate his expectations for retirement.
“I was hoping to work until 55, but the way things are, I think it would be more like 65,” she acknowledged, adding that she is trying to convince her children to consider educational opportunities that don’t require borrowing. “I try to teach them the long-term consequences of student loans. “If they can avoid getting into that debt, that would be ideal.”
‘I’m praying it’s not crazy’
In its study, Northwestern Mutual found that only about half of Gen X survey participants believe they are or will be financially secure, which is 5 percentage points less than respondents across all age groups. Gen X respondents also expressed less confidence in their prospects for career success and their ability to deal with the unexpected or emergencies than the rest of the respondents.
“Debt, in general, worries Gen X,” said Mitchell of Northwestern Mutual. “To the extent that some of them continue to carry student loan debt, I think it can be a focus, a point of reference for broader retirement concerns.”
Adding to this widespread anxiety is the uncertainty student loan borrowers feel about the size of the monthly bill they will face when their payments resume.
“I’m praying the number isn’t crazy,” said Thompson, the Washington recruiter. She said she was financially and mentally prepared to pay up to $500 a month, but she worried what would happen if the payments were higher. “I hope it’s not more than that,” she commented.
Terrell Grant at his home in Sacramento, Calif., on Aug. 8, 2023. (Ian C. Bates/The New York Times)
#Generation #faces #retirement #student #loan #debt