Student loan debt: the invisible and incredible investment drain
In the annals of investment, the story of student loan debt is not too often said, let alone treated with a sense of urgency. After all, what does portfolios, capital gains, or passive income have to do with paying off the package that makes college education possible?
Here is one after all, then, for the unconscious finance directors and investment experts around the world: “After all,” that debt has to be paid off every month – and it has reached record levels not anticipated a generation ago – newly trained college graduates are lucky if they have a few quarters left for the milk money.
“I believe we have a higher education bubble,” says Derrick Handwerk, managing partner of Handwerk Multi Family Office in Lansdale, Pennsylvania. “When the average family cannot afford the average education or a house, it’s a bubble. The government allows the prices of a bachelor’s degree to significantly exceed inflation by having loans available that many students cannot repay when they graduate. “
Such as: “I work with many doctors coming out of medical school with over $ 150,000 in debt and the prospect of reduced income due to the Affordable Care Act,” Handwerk says.
A look at the numbers. Statistics from the Institute for College Access and Success tell much of the story. For the Class of 2014, the amount of debt per student reached $ 28,950 per borrower, with seven out of 10 students owing money. Over the past decade, student loan debt has grown twice as fast as inflation; tuition fees have increased at about the same rate over the past 40 years. By many estimates, the number of student debt has passed the $ 30,000 mark.
“Total student loan debt in the United States currently stands at over $ 1.3 trillion, an incredibly high number that represents millions of college graduates unable to work towards financial independence from financial institutions,” says Jeffrey Zucker, an angel investor and president of Green Lion Partners in Grand Junction, Colorado. “It’s no surprise that people with student loans are less able to invest their savings in profitable businesses.”
In other words: if you could make $ 10 a second, it would take over 3,200 years to pay off $ 1.3 trillion. In fact, it would take much, much longer. The debt figure is skyrocketing by some $ 2,700 per second.
Not even stock in Alphabet (ticker: GOOG, GOOGL) can keep pace. This story you are reading cannot either; a student loan FinAid.org’s “Debt Clock” updates the number every second. $ 1.36 trillion is probably in a few weeks.
The trend is likely to continue. And where the rubber hits the road, a new Allianz Global Assistance survey of 5,000 current students comes to the conclusion: “Student loan poverty” may not end soon. After tuition fees, about one in four students say they have no extra money to spend. Almost half (44.6%) pay for their education in full – and around 12% don’t even know how much they owe.
Is all of this preventable? Perhaps. Loans don’t have to be an option of last resort, even if they are the first thing too many students rely on before the first bill arrives.
Jeremi Gill, who graduated from King’s College in 2015 with a Bachelor of Arts in Political Philosophy and Economics, has undoubtedly put the latter major to his service. “I was fortunate enough to come out with only $ 11,000 in loan debt,” he says. “And I started dropping that right away.”
Gill, single, 22, had several jobs at the university and continued to do so after graduation. He still does today. “I make sure I pay half of my monthly paycheck on my loans, and the other half for living expenses and travel.” As for the investment, it started with the Acorns smartphone app. (Its founder, millennial Jeff Cruttenden, came up with the idea while he was still in college himself.)
Acorns takes everything Gill spends on credit and debit card related purchases and rounds it up to the nearest dollar. The change is invested in six different funds depending on risk tolerance. It is particularly aimed at young investors who are suspicious of brokerage houses.
Gill considers himself to be one of those.
“Talking to an investment professional is intimidating,” says Gill. “The rare times I have, they speak a different language than you, aren’t up front with the fees, and you almost feel like you’ve been cheated of your money somehow.” They don’t exude confidence.
While this credibility gap remains a huge hurdle for financial advisers, many professionals have the best interest young graduates to the heart – as well as the following.
Give loans as a last resort. “The bottom line for prospective students is to exhaust all other resources before taking out a student loan,” says David Almonte, member of the AICPA’s National Commission on Financial Literacy. And these resources are numerous: “scholarships, grants, financial aid, student work programs and part-time jobs”, among them.
Take a page from Gill’s playbook: A concert that made just $ 100 a week, if it went straight into tuition, would offset $ 20,000 over four years.
Or, students can choose to start their first two years at community college before moving on to a more prestigious university. “And if they live at home, they can graduate for less than $ 50,000 in total,” Handwerk says.
Investment options. These ideas, as good as they may sound, do not directly answer the question of how college graduates can find the money to invest. If it’s a choice between Alphabet Class A stock at $ 713 a share and rent, guess which one wins 99.9 times out of 100?
Yet some investments go through passive and painless methods for graduates who land full-time jobs.
“According to a 2014 report from the American Benefits Council, nearly 80% of full-time workers have access to employer-sponsored pension plans,” says James Capolongo, manager of deposit products and underwriting at TD Bank and based in Mount Laurel, New Jersey. “If your employer matches a certain percentage, contribute at least the minimum required to take advantage of your business match. That’s free retirement money.”
“While paying for financial advice may seem out of reach, even young professionals should strongly consider at least one one-off consultation with a financial professional,” says Anthony Criscuolo, chartered financial planner and portfolio manager at Palisades Hudson Financial Group Fort Lauderdale, Florida, office.
“Just like entrusting your health to a doctor or your car to a mechanic, a check-up with a financial professional can pay off in building a solid long-term financial plan,” he says.
And in the same way you would find an ace mechanic, word of mouth could prove to be one of the best avenues. Of course, it won’t pay off today’s loan bills this minute, let alone this decade.
But if you get the right advice now, Criscuolo says, it can definitely set a new course, “and will prevent problems down the line.”