The Secure Retirement Institute at LIMRA (formerly the Life Insurance and Market Research Association) has found that Americans under age 35 have more than tripled their education debt since 1989, from $3,000 per individual in 1989 to over $19,500 in 2013 (adjusted for inflation). The economic and political ramifications of such an outstanding amount of debt placed on such a large generation, many of whom are only beginning their careers while emerging from a significant economic recession, are still not entirely understood.
However, the Institute, in the report Calculated Choices: Examining Debt and Retirement Savings Decisions, does estimate that present-day Millennials who start their careers with $30,000 in student loan debt (just over the average debt load of graduates in 2014, which is $28,950) may have a stunning $325,000 less at retirement than their debt-free peers.
This nest-egg-sized disparity is significant, to say the least, and may be large enough to eventually shift attitudes towards college education itself. According to the report, “The general belief has always been an investment in education was worthwhile because it would result in a higher paying career. However, the recession impacted millennials at the start of their careers, with many ending up unemployed or underemployed for years after they graduated.2” In essence, the rising cost of college loans and the lingering impact they have on personal finances may signal for many that a college education is no longer a guaranteed positive lifetime investment, or at least not if it requires first accessing a large amount of student loans.
Considering the high interest rates that come with both public and private student loans, it isn’t surprising that the amount of debt carried by a college graduate (or student, in the case of the 41% of college students who fail to graduate, often taking out loans along the way) directly influences the amount they are willing to put towards long term savings once they join the workforce. According to LIMRA’s research, millennials without student loans are 60% more likely to maximize their employer’s retirement plan contribution match compared with those who are paying education loans.
Among the report’s findings, it’s also interesting to note that for pre-retirees age 55 to 64, the average education debt increased from $600 in 1989 to just under $8,000 in 20132, revealing that many pre-retirees are taking on loans for themselves or family members. These new obligations, taken on late in retirement, have the potential to hold back many retirees and, unlike many other expenses, cannot be discharged by bankruptcy.
Agents would do well to note these changes and watch for occasions to offer products that speak to these needs. For example, a variety of Indexed Universal Life (IUL) Insurance products offer tax-free policy loans* that could help provide supplemental college funding. These products could be helpful for parents or grandparents interested in mitigating the cost of college tuition for their loved ones, or providing a large tuition-friendly death benefit for loved ones in case the worst should happen.
For more information on how to position these products, contact Simplicity Life today at 800.921.3100. Don’t forget to ask us about our industry-leading sales training sessions throughout 2019!
*Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult a tax professional. Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract or MEC, under IRC section 7702A. However, withdrawals or partial surrenders are subject to income tax to the extent that the cash value in the policy immediately before the distribution exceeds the owner’s tax basis in the policy. If taken prior to age 59½, a 10% federal tax penalty may apply.