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COVID triples the savings rate in April? Raining money and locking wallets

Background

The Bureau of Economic Analysis data released on Friday shows that the personal savings rate tripled to 33%, an historic high. This follows March’s jump from 8% to 13%. If these are hard economic times, what in the world is going on? How is it that COVID triples the savings rate?

Findings

While employee compensation tanked, stimulus payments more than compensated: While compensation fell 8%, a huge slug of federal stimulus payments and incremental unemployment compensation actually raised personal income overall by 11% in April.
The floor fell out of spending: Personal spending was down 14% in April, and 20% over March and April combined. Higher income, lower spending = COVID triples the savings rate vs. March…and quadruples it vs. February..
No one wants to see a doctor: The single largest spending drop is health care. People either can’t, or won’t, see health care professionals.
Going out has gone away: Eating out, hotels, events, gasoline – all are down dramatically.
Forget travel – it’s in free fall: Airline spending is down 94%, public transportation 91%, as any conveyance you’d share was shunned by almost everyone.
Clothes? What clothes? Spending is down by half. Given reports that video call participants are dressing up only the upper half of their bodies, perhaps this makes sense.

Implications

These data show which industries are hardest hit in the depths of the lockdown, and may point to those that will have the hardest time persuading consumers to return. When we see the May data in a month, it may show some tentative rebound in some sectors given gradual reopening of the economy.

It’s easy to conclude that airlines are in for a rough time, but there are some more immediate consumer issues and concerns:

Non-COVID health issues: Scared consumers are postponing any medical attention. This will come home to roost in declining health for many. Hospitals and health groups are already reaching out to their patients to persuade them to come back in.
Is it safe? Not just dentists – but any business – will find people asking this question. While this is obvious – it may be that critical sectors like health care will lead the way in getting consumers back in to businesses. Medical offices and hospitals may also be able to lay claim to using the most advanced disinfection techniques.
Will the stimulus continue?: The CARES act has burned through the majority of its stimulus payments by the end of April. If it doesn’t continue paying, and states don’t pick up the slack, we’ll see a significant drop in income and another big hit to spending.

The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report. Because it comes out about a month after the end of a period, we don’t know what happened in the past 30 days. All the data is reported annualized – e.g. the April numbers reported are 12x the actuals observed because the BEA always annualizes for comparison purposes. This means that the press usually gets it wrong and reports annualized data as one month’s amount.

COVID-19 increased personal spending? Quarantine spending jumps

COVID-19 increases personal spending -- on alcohol and food — Courtesy of Pixabay/ Ich bin dann mal raus hier.

Background

Is it possible that COVID-19 increased personal spending? Not overall, but yes, in certain areas. We know from my previous post that in March people spent 8% less overall, with the biggest hits being health care, entertainment, and eating out. But the same Bureau of Economics data shows where spending increased. March data is the most recent currently available. Until we get April data (end of May), this should show the early trends – or the tip of the iceberg.

Findings

Eating is big: Spending on groceries (excluding alcohol) jumped 20%, $181 billion. Anyone who visited a supermarket in late March is aware of the rush of stocking up on foodstuffs.
Sin is in: Alcohol sales were up 17%, and tobacco sales were flat. In the first week after lockdowns started, ending 3/21, Nielsen reports alcohol sales were up 55%. Many of us have experienced Zoom happy hours.
Food and alcohol increase offsets eating out: The jump in food and alcohol spend of $205 billion is almost exactly the same as the decline in food service spend – restaurants and bars – of $207 billion.
Housing spending was flat (so far): The cost of housing, including rental payments and utilities, was flat. Of course March rent and mortgage payments would have been paid before the lockdowns and layoffs started.
Drugs up — briefly?: Spending on prescription drugs increased in March, probably as concerned consumers stocked up on medications. Early indications are that in April and May drug spending dropped, especially doctor-administered drugs (people stopped visiting medical facilities).

Implications

The March data shows the initial spending changes. And yes, in a couple select cases, we saw COVID-19 increased personal spending. But is it the tip of the iceberg? Or will we see more changes? While we don’t have the April spend data yet, we know April unemployment numbers jumped dramatically and spending is probably dropping further.

Likely food and alcohol will hold up. Kroger, the largest US grocery chain, hired 100,000 people in the eight weeks ending mid-May, a 22% increase. As long as people avoid restaurants, they’ll be buying for home.

Most other categories are a big question mark. April data, pre-reopening, should look grim for categories like restaurants and entertainment. But reopening doesn’t mean business income returns, or that people are willing to return to public spaces. A Seton Hall study showed that 61% of sports fans wouldn’t return to live events until there is a COVID-19 vaccine.

I’ll be reviewing the April BEA data when it releases on May 29.

The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report. For housing, rentals are actuals but home owner payments are a calculation of the value of the home as a rental, not the actual mortgage payment.

COVID-19 drives up savings? Wait — what?

Background

How is it possible that with the pandemic leading us into recession that we would see that COVID-19 drives up savings? We’ve seen the personal savings rate, what people make minus what they spend, hovering around 7-8% for several years. Yet the March data just released by the Bureau of Economic Analysis shows the savings rate jumping to 13.1%. How can this be?

Findings

It’s because people stopped spending: Personal income was actually down 2%, or $382 billion, in March. But – personal spending was down 7.5% or $1.1 trillion. As people understood the virus risks, they stopped spending. Less spending means more money saved. In the short term, COVID-19 drives up savings.
The biggest drop was health care spending: This may seem the strangest reduction. The news is constantly talking about hospitals taking in virus patients. Presumably people decided to avoid non-critical contact with health care professionals, including office and hospital visits. Spending dropped over $400B or 16%.
Fun outside the home plummeted: Events – sports, museums, theater, and health clubs – saw a 45%/$106 B drop in spending. Gambling was down 33%/$54B as casinos were avoided.
Forget travel and restaurants: We know these industries are being heavily impacted by virus worries. Food services were down 23%/$207 B. Accomodations, e.g. hotels, were down $68B/43%. Air transport was down $57B/54%.
Cars can wait: New vehicle sales were down $87B/27% and gas spending was down $50B/16%. Uncertainty causes people to postpone purchases, and if you’re not driving as much you don’t spend as much on gas.

Implications

First, don’t think that seeing the savings rate up with coronavirus is a positive sign. People’s reduced spending means they were preparing for what they knew was coming. In April, unemployment claims are way up. Companies are reducing salaries. If people don’t, for example go to restaurants and sporting events, that means workers in those industries end up with little or no income. In other words, March was the consumer spending crash which pointed to the industries that will be hardest hit and therefore cut staff.

April data will look worse. Personal income will decline substantially. During the Depression in the 30’s, the savings rate went negative as the country reached a 25% unemployment rate. If we see a similar trend, look out. Americans will be postponing their underfunded retirement, but may not be able to find jobs.

I’ll be looking at the savings rate every month to understand the impact on consumers. Financial services firms will need to be flexible and understanding of their clients. This won’t be the time to scold people for not saving more for retirement.

The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report. The health care category incudes hospital and nursing home services (down $144B), physician services (down $128B).

Why can’t Americans save? The compression of the savings years

Background

Why can’t Americans save? How much do our life delays affect our ability to succeed in retirement? Past posts show the changing demographics of the traditional American two-child family: Getting married later, waiting longer to have kids, but – retiring at the same age. When combined with people living longer, what does this mean for the average family’s success in saving for retirement?

Married with children is the most common type of household in America, so we’ll look at statistics for that family in 1970 vs. today.

Findings

Families are starting much later in life: Compared to 1970, couples are getting married on average 7 years later, and having their first child 8 years later.
The children are launching not long before the parents retire: If the family has two children, the second one will graduate college when Mom is 54 years old. (See my post on marriage and children). This is 8 years later than the 1970 family. In this analysis I’m ignoring the impact of boomerang children. They can keep costing their parents money even into the parents’ retirement!
The age of retirement hasn’t changed: It’s still 65 on average, the same as in 1970. While it did drop a bit in the 80’s and 90’s, it’s back up to 65.
We’re living longer. If you make it to age 65, on average you will live to 85, or 20 years in retirement. In 1970 the average time in retirement was only 15 years.
The “prime” savings years are dramatically compressed. The point at which the kids move out on their own is also a time when the parents are at their earnings peak. If children are moving out 10 years later in their parents’ lives, that means a lot less time for the parents to be saving money free of the encumbrance of paying for their children.

Implications

The recent years haven’t been setting us up for savings success. Having less time to save for a longer retirement is a troubling situation for an American family. Why can’t Americans save? New families, starting later, saddled with student debt, and having a harder time launching (boomerang kids), means it’s harder to save. Add onto this the kids being around (expensively) later in life, this means that by the time families can focus on saving money, it’s almost time to retire.

This issue points out the importance not only of more focused savings earlier in life, but also more carefully managing expenses on children and expenses in general. What are the tradeoffs and how have Americans done at this? Our next posts will suggest not well, and that we need to find new paths to help Americans succeed.

The small print

This analysis requires some simplifying assumptions. It’s important to understand them – but none of them risk changing the conclusion in understanding why Americans can’t save.

Marriage age is the age of first marriage for women taken from the US Census. For men the age is about two years later. Women marry younger. I’ve used the women’s age because it can be compared to the time between first marriage and first birth, older CDC data here.

The data on when/if children graduate college is messy. I’ve simplified by simply using the rough estimate from various sources that the second child arrives about 2 years after the first, and then adding 21 years to get to graduation date.

Retirement age is for men, from work by Alicia Munnell. That age did drop in the 80’s and 90’s. (see Alicia’s article for the various reasons) In recent years the age rebounded back to 65. I’ve used the age for men because the data for women is hard to interpret. Because so many more women are in the workforce, and later, today than in 1970, the retirement age has gone up dramatically in that time. Because that’s largely a function of more women working, the data doesn’t represent real retirement trends. Hence I’ve used men’s retirement age.

Life expectancy here is how long you’re expected to live if you reach 65. Most data you see reported are life expectancy at birth. This is lower than if you’ve already been around 65 years! Americans’ life expectancy after 65 is their retirement duration. Here, I’ve taken an average of men and women, again for simplicity.

How long is retirement? The looming crisis

"Retirement" sign, related to how long is retirement

Background

Americans are living longer. Given this, how long is retirement for the average American? How will this affect their need for retirement savings?

Findings

Chart showing life expectancy of 65 years olds based on year they turn 65

Americans are living longer: CDC data shows that from 1970 to 2017, the average life expectancy at birth has risen 9 years for men (to age 76) and 6 years for women (to age 81).
If you make it to 65, you’ll probably make it well into your 80’s: The same data shows that if people who reach age 65 will live about 20 years after that (see chart). Men on average live to 83, and women to 86.
The average retirement age is about the same today as in 1970. For men this is 65 years old. The data for women shows a rising retirement age, but this data is tricky because so many more women are working, it’s hard to compare to historical data. I used Alicia Munnell’s analysis to obtain this data.
The average retirement is about 21 years, 6 years longer than in 1970. This is calculated by comparing retirement age to life expectancy, and is a bit tricky – see the “small print” section for details.

Implications

Ouch! This is a key piece of the puzzle around American’s savings challenge. We know from other posts that we are not saving as much as we used to. At the same time, we need to fund a longer retirement. This is a toxic brew – less savings for a longer retirement.

It is critical to American’s comfortable retirement that we identify ways to help them save more. The next post will look holistically at the combination of demographic changes that are challenging our financial success. Following that, the key will be identifying ways to help Americans save more.

The small print

There are a couple of simplifications I’ve made in order to calculate length of retirement. Men and women have different retirement age averages. However, for women, this is particularly challenging as in 1970 a smaller percent of women worked, by the traditional census definition, and that reduced women’s retirement age average.

We know from the previous post on marriage that women are about 2 years younger than their husbands on average. I use this statistic for heterosexual marriages to apply to retirement as well. If husbands are age 65 at retirement, then their wives are probably 63 years old at that time.

Retirement is a tricky definition. Here, Munnell’s data calculates the age at which fewer than half of men or women are participating in the labor force based on the Current Population Survey. Some other studies look at the age at which people start taking Social Security payments.

The final piece of the calculation is the average retirement length. For men, I use the average retirement age and the average life expectancy at age 65 to calculate this. Life expectancy of 83 years minus retirement age of 65 = 18 years.

For women, I assume they retire the same time as their husband (simplifying assumption). That means they retire at age 63 because they are two years younger than their husband. Then I compare age 63 with the average life expectancy of a woman at age 65 to calculate years in retirement. Life expectancy of 86 years minus retirement age of 63 = 23 years.

Finally, I average the two retirement durations, men and women. Women will live in retirement longer than this number, men will live a shorter time.

Marriage and birth age trends: Postponing life

Image of older couple getting married, tied to marriage and birth rate trends — Image by Veton Ethemi from Pixabay

Background

In previous posts we’ve looked the dual challenges that Americans spend more and save less. The next series of posts look at why. This first view looks at the marriage and birth age trends that may be postponing the point at which Americans “settle down” and start saving. Are people postponing marriage and having kids?

Findings

Absolutely. Two charts track the marriage and childbirth trends since 1970:

Americans are getting married later: Since 1970, the median age of first marriage for both men and women has climbed about 7 years. It’s now age 30 for men and 28 for women.
Kids come later too: Over the same time period, the mean age of the mother at the birth of her first child has risen 5 ½ years. (see below on why mean is an OK measure here).
Cultural and economic factors drive the marriage “delay”: Some people choose to live together without getting married. This is up from almost no one in 1970, to 10% of 25-34 year olds today. Social attitudes toward the need to marry, and early, have changed substantially. Economically, women say they want to marry employed men. However, among never-married 25-34 year olds, the ratio of employed men to all women has dropped from about 1.1 in 1970 to 0.9 in 2012. In other words, there aren’t enough “qualified” (loaded concept) men available.

Implications

These findings suggest that marriage and birth age trends drivers may be reducing the savings rate. We already know Millennials are “boomeranging” back home due to financial difficulties. Less financial stability probably means less savings than previous generations at that age. Psychologically, pre-marriage Millennials may not take savings as seriously as married couples. Therefore, if they marry and have children later, they are going to be later to the savings party.

This is only the first part of the analysis of demographics on savings rate. Still, already this suggests that working with Millennials on saving early in life may be even more important than with previous generations.

The small print

The marriage data is from the US Census. The childbirth data is from the National Vital Statistics reports. Note that the marriage data is median age, the childbirth data is mean age. The two sources usually report on these different calculations. Analysis of some median vs. mean data for childbirth age shows the numbers aren’t very different and show the same trend so I’ve used the readily available mean childbirth age.

The personal savings rate: spending into oblivion?

Millennial pulling empty pockets from his jeans, implying a very low personal savings rate — Image courtesy of Pixabay

Background

In 1867 Horace Greeley, the famed journalist, observed of Americans: “We are energetic, we are audacious, we are confident in our own capacities and in our national destiny, but we are not a systematic, a frugal, economical people.”

How well he predicted where we are today: a culture that has embraced spending, and abandoned thrift. Perhaps the best long-term indicator of this malaise is the Bureau of Economic Analysis’ calculation of the personal savings rate trend. This is a statistic that is based on disposable personal income vs. expenditures. Data is available back to the early 20^thcentury. This gives us over a 100-year window into the trend in how much we save. Will that statistic bear out what Greeley perceived over 150 years ago?

Findings

The answer, perhaps unsurprisingly, is yes.

Graph of the personal savings rate since 1927

The personal savings rate has fluctuated dramatically over the past century: Its lowest point was during the great depression when it was negative in 1932 and 1933. People had to dig into savings just to survive. It was dramatically positive – over 25% — during World War II, when the war economy meant everyone was working. On the other hand, you couldn’t buy anything due to rationing!
When boomers grew up, the savings rate dived: During the post-WWII prosperity, the savings rate gradually grew to 13%. But in 1975, after the majority of the Boomers turned 21, the savings rate began a consistent decline. Just before the recession of 2008, the rate was at only 3%.
Some hope based on recent behavior: The savings rate did bump up after the recession, but not to historical levels. It’s still about half of what it was before Boomers entered the workforce.
The BEA summary statistic hides an ugly truth: Here the devil is in the details of the statistic. Disposable personal income includes employer contributions to 401k plans and pensions, because the BEA sees this as a way Americans generate savings – fair enough. But the total amount of “personal savings” in 2019, $1.3 trillion, is less than the employer contributions to retirement accounts of $1.5 trillion. That means that if we look at what Americans actually bring home in their paycheck, they spend it all – and more.
Many Americans admit to not saving anything: Many studies have highlighted that many families can’t or don’t save. A Charles Schwab study found that 59% of Americans live paycheck to paycheck.

Implications

The obvious overarching implication for our country is the one that we’ve been hearing. A lot of families will be in trouble not just in retirement, but also if they have a significant event – e.g. a job loss or an extraordinary expense.

But the big challenge is that this is old news about a stagnant problem! The news media, and financial websites, are rife with a simplistic answer: save more money. This message has been out there for 20 years, but hasn’t worked. We need to drill down deeper in subsequent posts to better understand how to address this trend:

What has changed that drove down savings?
How does this differ by generation?
Why are Americans behaviorally averse to savings?
And most importantly, how can we help people change their behavior to achieve better outcomes?

The small print

The BEA data, including the long-term trend, is central to this analysis. Because the currently available data tables go back only to 1959, the data for earlier in the century is from a previous analysis I did on this topic but I can no longer link back to BEA data as it is no longer available.

The BEA revises their calculation at times, and the most recent revisions’ biggest change was making employer pension contributions accrual vs. cash based. What this really means is that the “income” employers contribute is based on what they should have put in given likely pension benefits, not what they actually put in. So if employers (including the government) aren’t contributing enough, the BEA still includes what they should have contributed in the personal income amount.

The cost of boomerang children: The gift that keeps on taking?

The cost of boomerang children represented by a real boomerang — Image by OpenClipart-Vectors from Pixabay

Background

I was with a group of a dozen parents recently and the topic that arose was “how much do you charge your children for rent?” Almost half of the parents had adult children living at home. It was a fascinating debate — some charged nothing, others a modest amount, one got market rate. This points to a broader question – how much does it cost parents to have an adult child living at home? And how the cost of boomerang children impacting their retirement?

This post will look at the trend of more children moving back home, and evaluate the financial impact of boomerang kids. I’m not going to address the psychological impact on parents or children when the kids move back in, or how to deal with them – that’s worth several posts on its own!

Findings

Graph showing percent of 25-34 year olds living with parents

Dramatically more adult children are living with their parents. Census data shows that since 1970, this proportion has more than doubled, from 7% of 25-34 year olds to 16%.
They’re not buying homes, as home prices skyrocket: The average home purchase price is up 57% since 2011. An Economist analysis showed that while in 1990, a generation of Boomers with a median age of 35 owned 1/3 of America’s real estate by value, in 2019 a similarly sized cohort of Millennials owned just 4%. The kids may be living at home while they save for a house, but…
Those kids don’t live for free: While it’s hard to quantify the cost of these adult children living at home, their parents may be spending roughly $1,000/month to support them. The table below shows some of the expenses that historically parents didn’t pay for when their children left home, but may be footing the bill for now. Food, utilities, cars, health insurance, cell phones – the cost of boomerang children adds up.
Potential big chunk of parents’ retirement savings: A Synchrony Bank study concluded that families in their 50’s have a median retirement savings of $117,000 (many have none at all). A child at home for 3 years costing over $35,000 would cost a third of retirement savings amount – not small change!

Parents’ incremental monthly cost of boomerang children living at home (details in the small print section below):

Food	$200
Utilities	$100
Cars/insurance/gas	$300
Healthcare – insurance and medical costs	$300
Cell phone	$100
Miscellaneous spending/allowance	$100

TOTAL $1,100

Implications

Boomerang children represent a significant risk to their parents’ financial health. At a time when the parents would normally be downsizing their house, their fleet of cars, and their expenses, they are postponing the reduction and spending on their kids. This doesn’t even count the potential impact of helping the children pay off their student loans, which some parents are doing. Bottom line, many Americans are likely risking their retirement because the kids are still on the payroll.

Because the unemployment rate of late 20’s kids is single digit, most of them should be able to reimburse their parents for living expenses. Yet fewer than half of these boomerang kids contribute anything for rent. Hence parents are paying costs they don’t need to! If you are advising clients on how to manage their finances, a key should be that the parents shouldn’t be too quick to foot the bill for their adult children. The kids can afford it, the parents often can’t, and the psychologists will say it’s healthier for the kids’ development to take on this responsibility.

The small print

The data on kids living at home is for 25-34 year olds, a readily available census category. If we had data for just 25-29 year olds, the percentage at home is likely much higher, perhaps double. The costs of the kids at home are all estimates. Food is a rough number based on what families typically pay for food, and the fact that the kids tend to eat a lot. Utilities assumes the kids are at home using electricity and heat when the parents are away. Cars are a big item. Insurance on a younger male can be $3,000 or more a year, and maintaining an extra car brings a lot of costs. Health costs are based on the incremental expense to add children on a typical corporate plan plus a higher out of pocket maximum for a family.

Household spending on transportation: the same today as in 1997?!

Image of a car on top of money, representing household spending on transportation.

Background

We saw in a previous post that the second largest expenditure for American households is household spending on transportation. This averages a bit over $9,500 a year, or 16% of the typical household’s budget. What are the components of this cost, and how is it changing over time? Are we really a world of Teslas and BMWs? Or, is that a perception based on those who live in the San Francisco Bay Area? This post will look at how we spend on transportation, and how it’s changed over time.

Findings

Graph showing 1997 vs. 2017 household spending on transportation, flat after adjusting for inflation.

We are actually spending less on transportation today than 20 years ago. After adjusting for inflation, the average US household actually spent slightly less on transportation in 2017 than in 1997 (though households are also slightly smaller now).
It’s all about the cars. Less than 1/10 of the household spending on transportation expense is for public transit. Almost all the spending is for the cars we drive. The average US household owns two cars.
New cars actually aren’t getting much more expensive! There are various analyses and challenges with how to interpret them. The the bottom line is that inflation is the main driver of the cost perception. In 1997 the average new car cost $20,305; inflation adjusted to 2017 this is equivalent to $30,010 – nearly a 50% increase. Kelley Blue Book reported the average 2017 new car price as $36,000.
Buy or hold makes a big difference: The average age of a car or light truck on the road is over 11 years. If you are driving an older car, with no loan to pay off, you’re avoiding finance charges, and possibly depreciation from a big purchase. On the other hand, a new car today will on average cost you over $9,000/year, including over $3,000 in depreciation. So, yes, if you buy a new BMW it will cost you a lot more than the household average. But if you’re an average American, you’re getting a much cheaper transportation deal.

Implications

In one sense, the implication is the hackneyed, long repeated one. It’s cheaper to keep your old car, than to buy a new one. But two concerning trends are making this better advice than ever.

One trend is the move to longer term auto loans. It used to be that you’d take out a 36-month (3 year) loan. However, now the salespeople sell you on a lower payment with a longer duration loan so that you can “afford” a nicer new car. Experian’s analysis indicates that the average new car loan period is now 69 months – almost six years. Consider the case of a prime borrower purchasing a $30,000 car with 20% down and a loan of $24,000 at 4.5%. The monthly payment is $714 and the interest paid over the life of the loan is $1700. But if you bite on a fancy $50,000 car, and put down 20%, a 6-year loan will result in a monthly payment of only $634 – less than the cheaper car. But over the course of the loan you’ll pay 3x as much interest plus the extra $20K for the car, and you’re in for a lot more depreciation.

The other issue is loan quality. Subprime auto loans have grown to almost 1/5 of the number of loans. An excellent New York Fed analysis shows that 8% of these are 90-day delinquent, and not surprisingly younger borrowers are the majority of these delinquencies. Across all borrowers, 7 million are 90-days delinquent, up a million from a year ago.

The bottom line is that if you’re helping your clients manage their money (or managing your own!) you should think long and hard about following the ancient advice, and avoid being upsold to a car you can’t really afford.

The small print

I used an online inflation rate calculator. The main source for household transportation expenses was the Bureau of Labor Statistics which conducts the consumer expense survey every year. Historical car prices were from the Bureau of Economic Analysis.

The “two cars per household” number is based on the US Department of Transportation, Bureau of Transportation statistics. Unfortunately, their definition of subcategories of registered vehicles has changed over time. Hence, it’s not possible to compare long term other than total registered vehicles. By today’s definition, out of 272MM registered vehicles in 2017, 13MM are larger trucks (probably commercial) and buses, so the vast majority of vehicles on the road are personal. For all these reasons, I’ve used the total registered vehicle number to calculate vehicles per HH which in 2017 was 2.05. The US household numbers I use to calculate vehicles per HH come from the US Census.

The education bind part II — the trend in student debt means mortgaging futures

Image of graduation cap and money, related to the trend in student debt — Image courtesy of 3D Animation Production Company/Pixabay

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

Graph showing the trend in student debt; student debt up 6x since 2003

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.