Month: November 2019

Background

The first of these two posts looked at the huge increase in college attendance, at a rapidly increasing price.  While the combination of these two factors has immediate budget implications for Americans, it gets worse. As students and families spend on education, there is also a long-term impact from the trend in student loan debt.  The presidential candidate debates have brought this issue forward as an impediment to households’ financial stability.  How big is the issue, and what does it mean for the average American?

Findings

• Federally funded/guaranteed student loan debt has skyrocketed to $1.5 trillion, up 6x since 2003.  During this period these loans grew from 3% to 11% of household debt.  There’s over another $100B in private student lending on top of that. This analysis keys on the federally funded or guaranteed loans as they are most of the market and detailed analytics on them are readily available.
• Double the cost, double the people:  We saw in the previous post that college doubled in cost (inflation adjusted). At the same time the number of outstanding student loan borrowers has more than doubled from 19MM to 44MM since 2003.  69% of graduating college seniors in 2018 had some form of student loan debt, and among the total population about one in six Americans have student loan debt.
• The average amount owed is $33K:  This is also the average amount for 25-34 year olds, those Millennials who are trying to buy houses and start families.  The median is $18K.
• Grandpa in debt too?:  Almost $300B of the student loans are held by people over the age of 50; $73B is held by people over 62.  There are almost 8 million borrowers age 50+. This is more likely paying for children/grandchildren’s education than the debtor going back to school.

What does this mean for an “average” household?  The monthly payment for those who are making payments averages $393, or close to $5,000 a year.  This number doesn’t include the 10% of accounts currently in default – not paying.   

Implications

The trend in student loan debt is changing the landscape for saving and retiring.  While death and taxes are supposed to be inevitable, apparently education debt is rapidly joining that category.  This is not only affecting students who exit college with loans, it’s affecting parents who are helping fund those educations with cash or by also taking out loans.  Whereas in decades past children struck out on their own after high school and got a job, now they go to school and spend their money and their parents’.

How can the financial services industry better help parents and students?  It should start with rational counsel.  1/3 of parents with children who are in college or who recently graduated college say they’ve postponed retirement because of education expenses.  A sound financial plan probably requires an emotional discussion contrasting parents’ retirement goals with their desire to help their children.  If the parents’ goal is to try to keep working longer (which may not be possible) to help their children, they should get a firm reality check from their advisor.  If they insist, then a careful examination of their financial reality is a must.  As we will discuss in other posts, our short-term approach to spending and finances has found outlets for irrational behavior – and now there is a new one: mortgaging our futures for our children’s.

The small print

The New York Fed quarterly report 2019 Q3 is an excellent source of information on student loans.  The US department of education releases statistics on debt by age, and the private student loan market is sized by MeasureOne.    A more detailed analysis would look at a more granular reality than is possible in this summary, e.g. by type of university, job prospects, etc.

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Background

While the average family spends only about 3% of their budget on education, we hear constantly about the huge education loan debt owed by many Millennials and Xers.  Is there a big increase in school debt, and if so, why?  This first of two posts on this topic covers college attendance and the trend in college spending; part II will look specifically at student loan debt.

Findings

A lot more people are going to college and spending a lot more!  The first half of this equation is attendance.  The chart below shows this.  While a seemingly large 24% of Boomers got a college degree, nearly 40% of Millennials finished college.  This doesn’t even include those who started and didn’t finish college, or went to a two-year school. The combination of those two categories is another 28% of Millennials.

With the increase in demand for college, the prices have been skyrocketing.  While there may be many reasons for an education growing in cost, over the past 30 years the cost of a college education has doubled after adjusting for inflation.  Whatever you may have paid for your degree, it’s more now!

Implications

While the real implications will be discussed after part II of this post, which will look at student loans, it’s clear that we are becoming a nation of college graduates.  Whether it’s parents or students who pay for the education, the rising cost of college means that families are investing a lot of money where they didn’t in the past.  The trend in college spending is rising dramatically! Stay tuned to part two where we’ll cover the 45 MM people in this country who are holding student loans.

The small print

College attendance by generation is from the Pew foundation, who used the Current Population Survey to determine what percent of 25-37 year olds in a generation had finished an undergraduate degree.    There are some nuances to how the CPS defines this – e.g. in some years it was completing four years rather than actually graduating.  The inflation-adjusted cost of college came from an analysis by the College Board.

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Background

The average American household spends 8% of their budget, $4900 a year, on health care. This cost has been rising over time  (see the How Americans Spend post).  However, the average cost hides a world of (financial) pain households are facing.  If you get insurance through your employer (50% of households) you pay less than buying on your own (7%). However, but any household that’s not on Medicare (14%) or Medicaid (21%) may be faced with some very difficult spending or saving choices given the high cost of getting care.  This post explores the reality for working households and digs deeper than the averages to understand different types of consumers.

This analysis won’t begin to look at the why of rising expenses – that’s an entirely different topic.  And because trying to find good data on health spending, and getting clear insurance plan comparisons, is slightly more difficult than inventing perpetual motion, treat the numbers below as a good indication of reality but not the final answer!

Findings

The short story is that many families can’t really afford health care – and financial services firms do them no favors by skirting the issue in their planning tools.

I’ll focus on costs for the stereotypical family of four – two parents and two children. The analysis below excludes their paycheck contributions to Medicare, Medicaid and other governmental programs taxed through employment. The short story is that the middle class can’t afford medical care!

• A family getting insurance through an employer probably is spending north of $10,000 per year, because:
  • The average portion of the premium they share is $6,000.
  • Their deductible, the amount they must spend before insurance kicks in, averages $3,500.
  • On top of this, plans have an out-of-pocket maximum capping the insureds’ annual spending.  If you’re a typical family with kids breaking arms and getting sick, you’re likely to exceed your deductible and then your out of pocket expenses can be thousands more.

• If the family is buying insurance on their own, they’re looking at $25,000 or more a year.  This assumes they are above the level of subsidy through the governmental exchanges, which is $103,000 a year – about 30% of US households.   No average is available, but we know that the average employer plan premium is almost $21,000. Premiums in the California insurance exchange are $15,000/year for a basic bronze Kaiser HMO plan and $25,000 for a Blue Shield Silver PPO plan.  That means that this family is likely paying in the area of $20,000+ for insurance, plus the deductible and copays. Hence, $25K/year may even be a low estimate.

If your income is below $103,000 subsidies kick in on a sliding scale but you still spend on care. If your income is at the US household median of $62K/year, the premium alone on the Blue Shield PPO will still run about $8,000/year.  Add onto this deductibles and copays and it gets expensive fast.

• Costs are rising dramatically in inflation adjusted dollars:  Anyone who’s paid for health care in the past 20 years knows this!  Per the chart – employee contributions for premiums have risen 149% while the overall premium cost was up 114%.  Deductibles are harder to quantify but in 2004 only half of employer plan participants had them; now it’s 85%.  

Implications

Financial services companies like to tell middle class consumers they need to save a lot more money for retirement. Unfortunately, they almost never talk to them about their health care situation and the tradeoffs that they face.  If you make $100,000 a year pre-tax, that may equate to $75-80,000 after income tax, and you have to pay for housing, food, clothing and transportation.   Spending $10,000 up to $25,000 or more on insurance and health care means either you forgo saving for retirement, or you go without insurance.  To adequately advise consumers on how to manage their finances, you have to understand their situation with respect to health care and tailor your recommendations, instead of jumping straight in and saying “just max out your 401(k)”.  

Most online financial planning tools offer little or no consideration of the health care cost.  The reality is that in many cases, the middle class can’t afford medical care. As an industry, financial services should be addressing health care costs head on, not skirting the issue like a dodgeball player.

The small print

Most of the excellent data for this post came from the Kaiser Family Foundation report, 2019 Employer health benefits survey which has a host of information on employer-offered health insurance plans.  The inflation adjustment can be found here.  California’s insurance exchange costs came from the Covered California website for 2019 coverage.  As mentioned above, the multitude of data sources, vast variations in insurance coverages, and general complexity of the system makes it very difficult to make perfect comparisons or cost of care calculations.

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