If we are to believe the headlines, we all know the student debt load is overwhelming, especially for millennials and GenZers. Just how overwhelming is the student debt problem? Matt Cosgriff of Lifewise in Minneapolis, Minnesota, says, “According to a recent Forbes article, 30% of millennials would donate an organ to pay off student loans! That tells you everything you need to know about how crazy this student loan crisis is.”
Why is student debt so large? “Student debt is large because it is widely available and the colleges figured out they could charge more and just have students pick up more debt,” says Jeff Rose of Alliance Wealth Management in Carobdale, Illinois.
The numbers are simply numbing. “The fact is that tuition just keeps climbing,” says Andy Brantner, Co-Founder of JARA Publishing in Houston, Texas. “The cost of an education has risen over 500% since 1985. Average people can’t afford it, thus ending up with a staggering amount of debt.”
Compounding matters is that those with this highest debt levels are at the age when saving for retirement can yield its biggest long-term rewards. This is an issue that must be recognized and addressed by every retirement plan fiduciary. Fiduciaries must acknowledge the obstacle of student debt present to young retirement savers. This will give any suggestions they offer to overcome that obstacle much more credibility.
Between the realities of today’s retirement saving environment and the relatively young age of millennials, a fiduciary needs to be able to explain, in a convincing manner, why student debt cannot impede retirement saving. Indeed, the first question often asked by this generation is “Why save now?”
“The easiest answer is the power of compounding,” says Matt Ahrens, Associate Financial Advisor at Integrity Advisory Group in Overland Park, Kansas, “but you have to remember that the environment around us as it relates to our investing opportunities has drastically changed in the last two decades. Defined benefit plans are elusive in the private sector so it’s more important than ever to build your own nest egg, and young professionals are likely not facing a high tax liability so ROTH contributions not only build retirement flexibility but also can create greater retirement cash flow without the tax bill.”
Jeffrey A Bogart of Sila Wealth Advisory in Cleveland, Ohio, says, “Why are the 20s such an important time to start saving for retirement? Retirement savers have time on their side. If a 25 year old saves $300 per month and earns a non-guaranteed 8% return they will have about one-million dollars forty years later when they turn 65. If they wait ten years to start saving (same amount same rate of return), they have about $447,000 at age 65. So waiting ten years will cost the retirement saver about $550,000.”
Newly minted college graduates have plenty of good reasons other than compounding to start saving for retirement right now. Rose says, “People in their 20s frequently have the lowest pay and lowest tax bracket they will ever be in. This means the money they save in tax free accounts will actually be worth more than money they put in later in life.”
It goes beyond the mathematics of finance and long-term investing. There is an important philosophical reason to start saving for retirement right now. “The obvious reason it’s so important to start saving for retirement in our 20s is because we have more time for the compounding effect to work,” says Eric T. Ludwig, CEO of Stockbridge Private Wealth Management, LLC in Sheboygan, Wisconsin. “But the less obvious reason is equally as important: if we don’t start the habit of saving and investing a portion of our income during our 20s, it’s easy to keep making excuses for not saving in our 30s and 40s. By starting the habit of saving with our first job out of college, we’re more likely to keep that habit throughout our earning years.”
Finally, people who have just left the embrace of their alma mater find themselves with unique, and often once-in-a-lifetime, advantages. Brantner says your “20s are important for retirement savings for a few reasons. First of all, it’s a time where many people don’t have families to support, so they have fewer financial obligations overall.”
Popular Methods to Both Save for Retirement and Pay Off Student Debt
The first thing many financial pros recommend is to rein in spending. This is an important lesson for young workers. It is one 401k plan sponsors might want to consider adding into their new employee enrollment meetings, for the lure of one’s first-ever paycheck may give a false sense of wealth. “Don’t raise your standard of living with your first job,” says Brantner. “One critical mistake many people make is when they get that first paycheck, they feel rich. So they go out and do silly things like buy new wardrobes, get car loans, more expensive apartments, etc. If you go this route, you aren’t going to feel rich much longer, and you won’t have any left over to put a solid dent in those student loans.”
In a similar vein, unless the student-turned-employee has a demonstrated discipline when it comes to spending, it might be wise to hold off on using those credit cards. Brantner says, “Say no to credit cards. While I’m not one of those people who believes that credit cards are Satan (if you have self-discipline, a good rewards program can be extremely beneficial), but if you’re up to your ears in debt, the last think you want is to add more high interest debt on top of it. Don’t spend money you don’t have.”
Besides cutting spending, there is the inevitable good news of “new found” money. It’s good to “expect the unexpected” and be prepared with a sound strategy to not squander that good fortune. AJ Smith, VP of Content at SmartAsset, a New York-based financial technology Company, says, “Apply tax refunds, bonuses from work or other cash windfalls to your student loans rather than succumbing to expensive impulse purchases.” Alternatively, she says, “Investigate forgiveness programs that can eliminate a portion of your debt. These are typically available to folks who work in a specialized field, such as nursing or education.”
Without that “new found” money, and after taking those first cost-cutting steps, if the retirement saver still finds servicing the student debt too great a challenge, as Smith alludes to, there are alternatives they must explore before sacrificing retirement saving to pay down college debt. “Look into different student loan payment plans and find one that fits within your budget,” says Leslie Tayne, Founder and Managing Director of Tayne Law Group, P.C., headquartered in Melville, New York, says. “If you cannot afford the normal payment, check with your provider to see if it offers a graduated payment plan that allows you to pay the debt down within about the same timeframe as the normal payment plan but with the ability to start with lower payments. These lower payments may help you adjust to working and budgeting your money, enabling you to live within your means as well as save for retirement. Even contributing a small amount of money each month to retirement – it could be contributions as low as $25 – will make a difference. If your company offers any type of match structured retirement plan make sure you are participating so you can take advantage of getting the free matched money.”
This is really all about coming up with a game plan that would make financial planners proud. “The best way, by far, to pay down student debt and save for retirement is to commit to doing so and keeping to a budget with your savings and debt service built in,” says Daniel Morgan, Managing Director of Independent Financial Planning in Sterling, Virginia. “The ones who are most successful at this are able to limit significant changes to lifestyle from before to after graduation. Living cheaply in those first few years of work will put a large dent into the student debt. As an added bonus, working for a company that matches a 401k plan will help with starting to save for retirement immediately. I encourage individuals with significant student debt to contribute at least as much to take advantage of the company match.”
Travis T Sickle, CEO at Sickle Hunter Financial Advisors in Tampa, Florida, agrees. He says, “You need to understand a few facts first. Find out what the minimum payment is and when is it due. Next, how much more can you afford to dedicate towards your financial future. This money will either be put towards debt or savings. In our experience, we have found that saving into a retirement plan up to the match is smart. The additional dollars should then be put towards the debt payments.”
Once we’ve reached this point in the lesson, the fiduciary has the opportunity to “close the sale” by emphasizing the usual benefits of the company 401k plan. Ahrens says, “Most of my friends my age (low 30s) are solely contributing to their company’s 401k plan. It’s easy, you at least maximize the company match, and it doesn’t disrupt the take home pay. Once that money gets into the bank account then the budget determines where it goes which includes paying down student debt.”
Who could turn away from free money? “The most popular way people save for retirement and pay off debt is to take advantage of employer matching,” says Rose. “This way, even if you are only putting in 5% of your income you can still get that employer match that makes it 7.5% or 10% of your income, depending on the employer.”
Additionally, and especially for workers in their twenties, the option of a ROTH – whether in a 401k plan or via a traditional IRA – can be compelling. “A popular way for people with large student debt to both save for retirement and pay off that debt is by using a ROTH,” says Ludwig. “Since contributions to a ROTH are made with after-tax dollars, there is a sense of security that they can withdraw their contributions just in case it gets too difficult to make ends meet. Contrast that with [traditional] 401k contributions that are far less accessible and impose IRS taxes and penalties.”
Alas, for some debt laden graduates, even pushing the above to the limit cannot unshackle them from the burden of paying the education piper. An increasingly common, albeit not necessarily popular, remedy is to reduce housing expenses in a rather draconian fashion. “One way to pay off student debt is for the graduate to move home after college and pay your parent ‘rent,’” says Bogart. “The ‘rent’ is applied to paying off the loan.”
Of course, he we’re going to hamper the parents, then let’s really hamper the parents. Bogart says, “One of my clients is a college professor and he took a job as an administrator at the university at which he worked. This new job paid about $30,000 more per year and he applied the extra money to pay off his kid’s student loans”
Unusual (But Successful) Ways to Both Pay Off Student Debt and Save for Retirement
Despite what was previously said, there are some who consider the “living at home” option a tad unusual. Morgan says, “An unusual way to pay down college debt is to ask your parents to match or help you pay down the debt. This is common enough in my experience that it really isn’t that unusual to see parents help their children pay down their debt or take on other expenses to allow for the debt to be paid down more quickly. The worst or best of these is the oft lament of living with your parents. While the non-indebted look at that with disapproval or a failure to launch, housing costs are consistently the largest percentage expense of take-home income.”
There are, however, much more “creative” ways to tackle the cash flow crisis caused by both paying down student debt and saving for retirement. “Really examining your budget can lead to identifying unusual ways to save money by cutting out expenses that can be re-allocated towards both paying down debt and saving,” says Tayne. “I once had a client who realized they were spending way too much money on dog food so they started making their own, which freed up funds they were able to use for paying off debt and contributing to retirement savings.”
You don’t have to go to the dogs to get creative. Sometimes all it takes is a perpetual motion machine. “The most amusing way I have seen someone pay off debt and save for retirement, says Rose, “was a 23 year-old who put all his bills, including his student loan payments, on a cash rewards credit card. He then took any money that he got back on that card and put it into retirement.”
OK, maybe that was more of a “one-time” than a “perpetual,” but there are other ways to achieve “perpetual” without violating the laws of physics. Brantner suggests the retirement saver start a “side hustle.” He says “the time to ‘burn the candle at both ends’ is when you’re young and have fewer responsibilities. Start a side hustle and put that money towards your debt. From being an Uber driver to starting a blog to simply picking up a part time job at a bar in the evenings, make the extra income while you can.”
Andrea Woroch, a Consumer & Money-Saving Expert based in Santa Barbara, California, has an interesting story along these lines. She tells FiduciaryNews.com “When I was working and living in Manhattan after college, I was barely able to make ends meet on my $28,000 salary. So I took on a babysitting gig a few week nights and waitressed on the weekends. The extra cash went toward debt so I had more wiggle room to save for retirement.” Woroch suggests several site that might help you with your “side hestle.” She says, “You can post your professional skills at eLance.com, help run other people’s errands at TaskRabbit.com, dog sit at Rover.com, find babysitting gigs at SitterCity/Care.com.”
Lastly, for the more adventuresome budding Donald Trumps out there, Maxim Maximov, Esq. of Maxim Maximov, LLP in Brooklyn, New York, says, “One of the more intelligent ways that I saw a person dealing with student loans was a GenXer renting an apartment larger than necessary and renting the extra room out to specifically pay for student loans. This created a sort of passive income stream. This person of course found a 2 bedroom apartment where the rent for the second room was double than the difference between a one and a two bedroom. Another client of mine rented a house and subleased all the rooms out so they lived rent free and had money to pay off for student loans and put a bit away for retirement. The key for both people was to psychologically mark the passive income for student loans and retirement. Both of these people lost a bit of comfort, but gained a lot of financial stability and learned many entrepreneurial skills along the way.”
In Summary
Is “college debt” and “retirement saving” an either/or decision? “You’ll hear different schools of thought on whether you should first focus on paying off debt or saving for retirement,” says Brantner. He believes “many people will use ‘paying off debt’ as an excuse not to think about saving. Unfortunately, human nature dictates that the majority of these people end up lacking the self-discipline to make real headway in paying down their student loans and other debt. As a result, not only are they stringing along their debt and paying more interest, but they’re also putting off retirement savings and failing to take advantage of compounding interest.”
In other words, it’s not a choice of one or the other, it’s an imperative to do both. Rose says, “The best thing they can do is get on a budget. If you are not deliberate with your money it will take you much longer to save for retirement and to get out of debt.”
It’s about dedicating yourself to achieve long-term financial success and a comfortable retirement. “Take a close look at how much you are spending to find areas where you can cut back or eliminate entirely,” says Tayne New York. “Work on paying off as much as you can on your student loans while working on saving any amount of funds you can that can be saved toward retirement. Make a commitment to putting money toward your retirement that you would have otherwise put toward repaying your student debt once you’ve paid off your student loans to quickly boost up your retirement savings.”
It’s not as hard as many pundits make it seem. Sickle says, “It’s not about being clever, it’s about persistence. Get a plan and stick to it. If you’re as cost conscious as you were in college, you’ll do just fine.”
Finally, here’s a true story that might shed the pleasant light of investing reality on this entire is. Bill Fish, President of ReputationManagement, located in Cincinnati, Ohio, relays the following personal anecdote: “In my 20s my wife and I had a good amount of student loan debt. In all fairness, she had far more than I, since she is the smarter one and decided to get her Master’s degree. We both wanted to fight so hard to eliminate that debt, but received some sage advice that I still try to pass along to this day. I believe our loan was somewhere in the 3.5% range, and on average the US financial markets have gained nearly 9% a year over the past 100 years. It didn’t make financial sense to go out and pay down large chunks of our loans when we could be putting some of that money away toward retirement that will compound on itself. Of course if you have pesky credit card debt that has a APR of 20% that is a completely different story, but we made the standard payments on our student loans for a good eight years, and not only did it free up some money to invest for retirement, but also helped build our credit score.”
We’ll leave you with this thought: Is college debt really the problem that it’s cracked up to be? Bear in mind, the average student debt is only $35, 000, only slightly higher than the average automobile loan. And, remember, the car loan has to be paid off quicker, so often has a higher monthly payment.
Of course, there is this radical piece of advice promulgated by some of the wealthiest entrepreneurs in the nation when it comes to dealing with student debt: Don’t go to college. Seriously. These very successful people either never went or they dropped out. With the cost of college reaching atmospheric heights, prospective students really need to assess the long-term value proposition. For STEM majors, it’s quite evident. For other majors, well, just how long would you like to live in your parent’s basement?
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