These days politicians canâ€™t agree on much of anything, but one ray of hope that seems to inspire our elected officials to reach across the aisles is education. Itâ€™s hard to dispute that higher education is not only the ticket for reaching the middle class (or the 1% if youâ€™re ambitious) itâ€™s also critical to Americaâ€™s future prosperity. Yet those same politicians who would argue for the prioritization of education are turning a blind eye to the fact that student loan debt is crippling millions of Americans. The numbers are staggering.
Education-related debt impacts more than 44 million of us (around 1 in 4) who owe $1.5 trillion total, making the burden of education the countryâ€™s second largest debt after consumer mortgages. Monthly student loan payments have increased from $227 in 2005 to $393 in 2016, according to the Federal Reserve and graduates owe $20,000 more than they did just 13 years ago. At this rate, weâ€™ll soon owe more for tuition and books than we do for the roof over our heads.
With graduates walking away with an average of $37,172 in loans, it doesnâ€™t take an economist to see that Americaâ€™s future generations have been handed an albatross to wear along with their caps and gowns. But of course that albatross isnâ€™t just the studentsâ€™ problemâ€”it could well be the next crisis that could strangle the American economy unless we act now.
If youâ€™ve never had student loans, it may be hard to understand what it feels like to be so financially burdened before youâ€™ve even earned your first paycheck. Itâ€™s terrifying. Remember that the better everyoneâ€™s standard of living, the more money our country has to run. Since all student loans must be paid back with aftertax dollars, that makes them even more of a burden for the monthly budgets of millions of Americans who will be dumping their income straight into student loan payments, not spending on products, services and other purchases that keep our economy churning.
Of course this is assumingÂ folks even continue to pay their student loansâ€”the default rate has doubled from 2003 to 2011, and an incredible 40% of borrowers are expected to fall behind by 2023, according to research from the Brookings Institute. In other words, the damage that student loan debt can do to the economy isnâ€™t going to wake us up one morning with a slap in the face like Lehman Brothersâ€”rather, itâ€™s a slow but steady sinkhole that is quietly gobbling up any hope for sustainable long-term growth in the U.S. economy.
Todayâ€™s headlines are replete with stories of Millennials who are postponing getting married, starting a family or buying their first homeâ€”home ownership for Millennials stands at 37%, compared to 45% of Boomers and Gen-Xers when they were the same age. While some might argue that Millennials just prefer renting, or that their job-hopping habits mean they donâ€™t want to settle down in any one place, the fact is that the majority of themâ€”53%â€”havenâ€™t bought a home because they donâ€™t have the money for a down payment, according to the Urban Institute. They also found that with every 1% increase in student loan debt, the likelihood of owning a house decreases by 15%.
And home ownership now is just one part of the equationâ€”what happens when folks who havenâ€™t been able to buy real estate fall on hard times in retirement? There will be no large asset to sell, no â€śdownsizingâ€ť to be done, no reverse mortgage to the rescue. And we havenâ€™t even touched on how student debt stifles entrepreneurship, and how debt-burdened folks will be more likely to work longer, thereby stressing the unemployment rate, or how the government is losing $170 billion on defaults and loan forgivenessâ€¦ any one of these things should be a wake-up call for politicians.Â All of them at once should resonate like a tornado siren.
If youâ€™ve been scanning this whole article searching for a silver lining to this cloud of doom, there is one glimmer of hope–the IRS recently gave some indication that they would be open to alternative financial solutions. It recently approved an employerâ€™s request to forego the requirement that employees must contribute to their 401(k) plan in order to get the company match.
Instead, if the employee was contributing funds toward their student loan debt, the employer would be allowed to match an equivalent percentage in their 401(k) plan. Thus allowing the employee to pay down debt while saving for retirement at the same time. Not a bad start, but we need to do more. Thankfully, there are a few good options that should have no problem securing bipartisan supportâ€”but we need to move now.
1.) Tax credits for childrenâ€™s education. Child tax credits are incredibly popular, for good reason. But they only incentivize parents to have children. Why not also offer a tax credit to parents to educate their children?
2.) Student loan forgiveness programs. Although this program is currently in the crosshairs of the current administration, student loan forgiveness programs can be a wonderful thing. Right now, these programs only benefit employees who work for tax-exempt organizations. Why not offer forgiveness to students pursuing careers in fields needed to keep our economy afloat, like doctors, nurses,Â teachers, and engineers?
3.) Tax deductions for tuition. Currently, tuition assistance only helps folks taking one class per semester, but why not incentivize students to get their degrees quickly? The sooner they make it into the workforce with a degree, the sooner they can boost their earning power.
4.) 401(k) matches for student loan payments. As with the example above, companies can establish a 401(k) plan, and allow employees to count their student loan payments as qualifying them for the 401(k) match. Iâ€™d advocate for going a step further, and allowing companies to contribute the 401(k) match percentage towards the student loans themselves. The sooner folks can get out of debt, the sooner theyâ€™ll be able to become homeowners and active participants in the American economy, and theyâ€™ll save billions of dollars on interest.
Iâ€™d argue that thereâ€™s no better investment that any companyâ€”or any governmentâ€”could make than putting money behind the next generation of taxpayers and entrepreneurs.Â Our countryâ€™s current politicians know just how important this is. Itâ€™s a poorly kept secret that on Capitol Hill government-allocated money goes toward paying down the student debt of the staffers of congressman and senators, without a ten-year service requirement.
Itâ€™s always been this countryâ€™s bread and butter to have citizens with money to earn, money to spend, and money with which to pay Uncle Sam. Itâ€™s time we took steps to ensure that more Americansâ€”educated Americansâ€”are set up to become fuel for tomorrowâ€™s economy rather than a drain on it.
John E. Girouard is author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research, and an Investment Advisor representative of Capital Investment Advisors.