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Money Matters: The burden of student debt takes its toll

A friend's son has gotten into the grad school program of his choice. He's not only heading for Budapest to study international economics, he's been offered an 80 percent discount on tuition. He's asked his parents to pay for that remaining 20 percent. They've said no. "We can't afford it right now," says my friend, who told her son to borrow the money. "He doesn't want to," she adds. "He's really scared about going into debt."

He may have to borrow but who can blame him about wanting to avoid student loans. A recent Pew Research Center report finds  student debt burdens "weighing on the economic fortunes of younger Americans, as households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation."

Here are some stats that my friend might not want her son to dwell on: Four out of every ten U.S. households headed by an adult younger than 40 currently have some student debt—the highest share on record, with the median outstanding student debt load standing at about $13,000. The median loan is equal to about two years’ worth of household income.

Meanwhile, households headed by a young, college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700).

Then there's a new report from the Brookings Institution with some variations on the same theme: between 1989 and 2010, the share of households with student loans jumped from 9 to 19 percent, and inflation-adjusted median student debt rose by more than 50 percent. Put in another perspective, by the end of 2009, student debt eclipsed credit card debt as the second-largest type of debt owed by American households, after mortgages.

As to my friend and her son, she hasn't told him yet, but she and his father plan to help him out with repayments when that part of the loan contract clicks in. He's on his own in paying for grad school, but not completely.

 

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Money Matters:Our grown kids' financial struggles are tougher than ours were at their age.

 Our generation may be "overinvested in our children." That's the reason financial planner (and consumer advocate), Eleanor Blayney, gives as why some of us have let ourselves slip into debt--despite carefully saving for retirement.

There is, of course, the job market problem--an issue for those coming out of college in the past few years. Now that they are grads, we may help them with rent, put them up rent free at our place and otherwise offer a helping hand until they find their footing. It can become a problem when the costs go beyond our vacation funds and tap into out retirement kitty.

But the issue is wider than that. Even their older brothers and sisters who entered the job market at a more generous time are struggling with financial disadvantages. According to a March study from the Urban Institute, they have considerably less wealth than we did at the same stage of life: They bought homes at the height of the bubble--the market's peak--and are now stuck dealing with the decline in home prices; they also put less money down (unless we helped with that 'little' investment), making it more likely that they have negative home equity. The UI study also reports that younger workers have tended to marry at a lower rate, have lower incomes than their parents, pay much higher costs for health insurance, and are more likely to be carrying college debt.

No wonder many of us rush to "invest" in them, to try and even out the balance and keep them heading in the direction of a lifestyle that al least nears the equal of ours. If that sounds frivolous--or keep-up-with-the-Joneses--it is nonetheless at the heart of a worry many of us have. A friend remembers her daughter's post-graduate apartment in a run-down (low-rent) section of a city in California. It was in a dreary neighborhood in a one-room apartment that had hooks on a wall for a closet, an entryway covered with planks (to keep you from falling into a hole) and space for little more than a bed and night table that doubled as the table where she ate her meals. "It made me want to weep," my friend tells me. "How could her father and I live in such comparative luxury and let our child live in such reduced conditions. I wanted to write her a check right then and there and demand she find a better place to live."

Most of us resist (as did my friend) and let our kids build character and work their way through the "tough" times. That is, we do that unless we feel the safety of our child is compromised. And then we invest, whether we have to tap our 401k account or not. It is one thing to say--as friends without children do--that children should stand on their own two feet, that we do them no favor by sheltering them from reality. No one helped them out when they were our kids' age.

And yet, times have changed. the burdens are blurred--and heavy. We don't want to spoil them--whatever that means--or enable destructive habits. And that remains a basic tenet in whether or not to help support a grown child. But beyond that, for many of us, the investment seems both necessary and worthwhile.

 

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Money Matters: There's still a positive ROI in a kid's college education

Paying for College: Congrats on graduation. Now here's an update on whether the degree is worth it.

The assumption has always been that a college education is the ticket to a good job--a career that will lead to financial independence and middle or upper middle class solidity. Then came 2008 and the great Recession. Kids who graduated from college since then have struggled to gain a foothold in career jobs. Friends whose kids have been entering or trying to enter the workforce since 2008 --well, those kids bear the marks of trauma. They are saving their money more carefully. They are not as free spirited, not as blithe about taking a post-grad year or two off to be a ski bum or bar tend their way across the country as a lark. A serious job outlook calls for a serious mien.

Today, only 45 percent of young Americans in that age group have a job, almost 6 percentage points less than when the recession started in December 2007. This trauma has raised the question about whether college--which can cost upwards of $200,000--is worth it. Is it worth it for our kids to take out loans to finance an education or for us to invest our savings--or income--in paying for four years of college? Some studies during the Great Recession and the slow-as-molasses recovery suggested it was a close call. But now there's this.

Writing on the New York TImes' online Economix, Catherine Rampell notes that "despite all the questions about whether college is worth it or not, college graduates have gotten through the recession and lackluster recovery with remarkable resilience."

The unemployment rate for college graduates in April was 3.9 percent, compared to 7.5 percent for everyone else. Moreover, among all segments of workers and their educational attainment, college graduates are the only group that has more people employed today than when the recession started.

Here’s the graph the TImes ran to show how employment has changed.

Source: Bureau of Labor Statistics, via Haver Analytics. Data refer to workers age 25 and older.

And here's another chart that shows that the number of college-educated workers with jobs has risen by 9.1 percent since the beginning of the recession. Meanwhile, those with a high school diploma and no further education are the near mirror image, with employment down 9 percent on net.

Source: Bureau of Labor Statistics, via Haver Analytics. Data refer to workers age 25 and older.

"In other words," Rampell writes, "college-educated workers have gobbled up all of the net job gains. In fact there are now more employed college graduates than there are employed high school graduates and high school dropouts put together." Even young college graduates are finding jobs.

So congratulations to all you college grads out there--my nephew among them. (Yay Ray!)                 

For them and their parents, it's a brighter picture out there than it was a year or two ago. It was worth the time and effort--and money it took to get that degree. So props to you and an old fashioned pat on the back, too. Now, can you pick up the tab for dinner?

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Money Matters: There's still a positive ROI in a kid's college education

Does it pay to pay for your kid's college? That's a question that's being raised in many circles as the recovery from the recession drags on and our college grad kids struggle to find a career job. Our sons and daughters who took out loans and now have to start repaying them--without a job to help them do it--are questioning whether they should have racked up that debt. And those of us who invested in our children's college education may be wondering how wise it was to put our money into tuition, room and board--upwards of $200,000 for some of us--when our kids are struggling to find work. What kind of return on investment is that?

The Bureau of Labor Statistics latest figures suggest that, all other issues aside, it is financially still a worthy investment. The unemployment rate for college graduates was just 3.7 percent in January and that was less than half the rate (8.1 percent) for those with only a high school diploma. Here are the stats in chart form:

Source: Bureau of Labor Statistics.

 

Catherine Rampell, writing in the New York Times blog Economix, notes, "the wage premium for those with a bachelor’s degree compared to those without one is also growing, particularly when you factor in the fact that college-educated people are more likely to be employed at any given time than less educated workers. One troubling trend hidden in all of these numbers is that the unemployment rate for those with some college but no degree — 7 percent — is not that much lower than that for people with no college at all."

Bottom line: It's not only worth the investment, it's worth that extra push to get them to stay the college course.

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College Costs: Are your kids getting your money's worth if you help pay the bill?

Many of us are called on to help out with the college bills for our emerging adults--and many of us agree to pay our children's way, no questions asked or raised. Or we may be asked or want to help--after the fact, as those college loans come due.

Our generation has operated under theory that a college education for our children is worth the financial sacrifice--hence the temptation and wide spread practice of helping with tuiltion as well as room and board if we can. Recent news stories have been surfacing that suggest some kids who have to borrow to go to college are questioning whether that higher education is worth encumbering themselves with debt only to find no job in their field when they get out of school. A sobering thought and one that has some reality behind it.

A recent study that relies on 2008 data reinforces our orginal beliefs. It finds that although college costs more in this country than others, the payoff is bigger. [See Sweden]. This graphic from Planet Money tells a good part of the story.

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Notes

*Data for Japan are from 2007.

Source: Organisation for Economic Co-operation and Development

Credit: Lam Thuy Vo / NPR

A few notes:

The data come from a recently published OECD report looking at educational data around the world. The cost of education includes tuition fees and living costs paid by the student, as well as earnings that students forgo by not working while they're in school.

"Benefits" is the difference in lifetime earnings between someone with a high-school degree and someone with a college degree.

For more on the difference in earnings between men and women in the U.S., see this study from Indiana University.

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Lending Money: The family fund that offers a helping hand and a living legacy

Many of us want to make things easier for our grown children--pave the road for them with a little help here and maybe even a lot of assistance there. That is, if we have the wherewithal to do it.

Recently, the New York Times weighed in on the issue, taking as its news cue presidential candidate Mitt Romney's remark, "I have inherited nothing." The initial point Times writer Ron Lieber makes is that a living inheritance comes in many forms. "It exists along a range from the free room and board for a 23-year-old intern to a stay of years for a 43-year-old single parent who has lost a job or recently divorced. The contribution can be as small as a first month’s rent or as large as the 25 years of payments that many parents now make on college loans they took out so their children would not have to."

The larger point is that the harder a young adult has to work to make the next geographic, career and economic step up, the more difficult it is to make that step. And repayment of student loans--a crisis that is raging among college graduates, both recent and long-time--is one of those hurdles that can keep a grown child from making that next step up. "The lack of any family help can have a compounding effect on the millions of people who have negative net worths well into adulthood thanks to their student loan debt," Lieber writes.

Meanwhile, even as college costs rise, today's economy is marked by a distinct lack of opportunity for college grads to move into career jobs that pay enough to cover living expenses. And that's why so many of us are helping our grown children. Recent data shows that  nearly 60 percent of 23- to 25-year-olds report receiving some kind of financial assistance from their parents--even when it's sometimes a stretch for the parents. As one 70-year-old parent told Lieber, he didn't want any of his three children "to go so far downhill that they’ll never get out.” In other words, those of us who can afford it are, in effect, trying to guard our children against downward mobility.

Lieber ends his piece with a suggestion for providing family funds for college students: a loan pool set up by the family. He noted that George Lewis, an 82-year-old lawyer in Quincy, Ill., along with his nine siblings set up an education fund in honor of his grandmother who "had a strong belief in education." Today, the nearly 50-year-old fund, with holdings of $111,000, lends money interest-free to scores of members of the extended clan. 

SInce that piece ran, Lieber has updated it with other examples of family funds. Some of the examples are of fairly prominent people--Berry Gordy (the founder of Motown Records), for instance--who set up family funds to lend money to the upcoming generation. But one made it all seem within reach to the non-prominent among us. Lieber reports that Suzette Haden Elgin, in a book called “The Grandmother Principles,” offered her own notion of a family loan fund that grandmothers can initiate. She suggests asking for a small deposit from everyone in the family, including children. Having the younger ones pitch in can help give them a stake in the process and a reason to track the fund’s growth and its beneficiaries.

Put that way, it doesn't seem so formidable and even has the frisson of bringing the family along on a daring step toward the future.

 

Money Matters: How much do we tell our grown children about our finances?

Cathy and Ben had to make a key financial decision: how much of his paycheck was he going to apportion to his 401k. Ben had been unemployed for five months, and now had a new job that would be paying him less--by about 30 percent--than his old job. How much could they put into a retirement savings account and still have enough cash to pay the their monthly bills? So when Cathy brought up the subject of the 401k while Ben was watching a baseball game with his 21-year-old son, Ben balked. "I don't want to talk about it now," he told Cathy. When she persisted, he was franker: "I don't want to talk about in front of [my son]."

"This is one of problems between me and Ben," Cathy says. "He's uncomfortable talking to his kids about family money. I think they should know. I don't see why it should be a secret."

This reluctance to discuss family money matters has been going on since Cathy and Ben's son and daughter reached young adulthood. When they were college bound, Cathy wanted to level with them about what she expected them to contribute to college costs. Ben said nothing, preferring to pick up the whole tab. A few months ago, with one child out of college and the other in his senior year, Ben lost his job. Cathy was frank with the kids: You can no longer expect any financial help from us. Ben once again evaded the issue. He didn't want his children to feel the weight of his job loss. Costs for his kids were the last thing he would trim from his budget.

Cathy sees her tell-it-like-it-is attitude as part of her midwestern heritage. She grew up in a small city at the edge of farm country. Where she comes from, she says, people were frank about everything, including money. Ben grew up in a sizeable city. His father supported the family of four boys in a style that was more than comfortable. Ben's dad never discussed finances with or around his children, and Ben is carrying on the family tradition.

He's not alone.  Martin Kurtz, former president of the Financial Planning Association, says most families have trouble talking about money. "There's no way to talk about it and not have emotion involved," he says. "It reflects our personal belief system." And when young adults on the cusp of independence are involved, it's even harder to sit down and chat about family finances. "When your child is heading toward become independent, you're transitioning from the end of one thing and the beginning of another," he says. "It's difficult because parents don’t want to give up control around money."

On the question of the 401k, business was as usual in the Cathy-Ben household. Their son left the room so Cathy and Ben could make a decision. But as soon as Ben left town the next day on a business trip, Cathy talked to her son about the issue. "He--and his sister--should be more familiar with how our finances work. By hearing us talk about it, he'd have a better idea how to set up his finances when he starts a family."

Sounds like a no-brainer, but not many of us are comfortable doing it. And those of us like Cathy who are usually end up having to do it alone.

Money Matters: A saving plan for the grand kids

We've been squirreling money away for our Grands. We started out by putting money into 529s, but the 2008 recession and the follow-on downturn in financial markets have discouraged us from plowing more money into that vehicle. I've opened savings accounts for each of them. The interest rate on those accounts is, like the rest of the investment firmament, discouraging. Those accounts are not even keeping up with inflation--but at least the money isn't melting away into the downs of the stock market.

The idea behind my and Paterfamilias' savings for our four Grands is simple: We want to make sure there's some money there for their education. Their parents will bear the bulk of that burden; maybe the Grands will have to take out loans to finance some of it. But we hope our little bit will take the edge off  the cost. Our parents did that for our kids--every birthday they sent a small check to put in an account for the kids. The wonder of compounded interest made those accounts a help when the college bills started rolling in. It's a role model we plan to emulate. But how to do it in today's difficult financial time?

PBS's new Web site, Next Avenue, which aims to cover financial (and other) issues of concern to those of us moving further along the age continuum, currently has a video with the heady title, "Saving for Your Grandkids." You can link to it here. It won't give you answers to or even ideas for the investment questions we're all wrestling with, but Ric Edelman offers very generalized caveats and options for those of us who want to put money away for our grandkids.

My take-aways from the video:

You can set up ways to save for their education or to save for their retirement. Few of us think about the latter. (How to do it, he doesn't say.)

Whatever plan you create for the grandkids you have, be sure you can replicate it for grandkids that might come along in the future. Fair is fair, even if someone's a latecomer.

 

Money Matters: Our college grad's expenses are our expenses--our worry too

Will the surveys never stop? Here's another one--this time from Ameriprise Financial--on how generous we baby boomers are toward our grown-up children--and how worried we are about their future financial security and ours.  

A December 2011 survey of baby boomers with $100,000 or more in investable assets reports that nine out of ten--93 percent--say they have provided some kind of support to their adult children. Paying for --or lending money for--college tuition comes in at 71 percent; help in buying a car, 53 percent. Parents are also helping with the upkeep of life's many expenses, like helping to pay for car and health insurance, rent and utilities.

Where does the money come from? 45 percent take it out of their spending money; 35 percent hit their regular savings accounts (about 8 percent tapped into retirement accounts) and nearly 15 percent take out loans to help their kids.

At the same time, more than one-third--35 percent--are worried that their children haven’t learned to manage money responsibly. More than that--nearly half--say their children don’t understand what it takes financially to prepare for retirement--even as they report that they are spending what they should save on their adult children.

As to those adult children at the receiving end, the survey found that more than half of them point their fingers back at their parents: they say they rarely or never talked to them about how they budget the family’s money.

Should we be surprised that kids coming out of college today are drowning in student debt? Or what the New York Times recently headlined as A Generation Hobbled by the Soaring Cost of College

 

Emerging Adults: Putting the burden of student loans in perspective

A few days ago I posted a blog on the heavy burden our college students carry in loans. It's hard for me to get my mind around $1 trillion--the amount of outstanding student-loan debt. I found these charts on NPR's Planet Money. They give some perspective on the bubble-like growth of debt college grads are currently saddled with.

1. Americans now owe more on student loans than they owe on their credit cards.

Source: Federal Reserve Bank of New York

Credit: Lam Thuy Vo / NPR

 

2. The amount of student debt being taken on every year has been rising rapidly for years now.

Source: College Board

Credit: Lam Thuy Vo / NPR