^^ Nevermind, I figured it out: He’s Jimmy Barrett from Mad Men!
^^ Oh, man, I suddenly have a craving for Utz potato chips after watching that! 
I think taking out a reasonable amount of loans to finance one’s education makes perfect sense if that’s the only option you have. And paying them off early clearly isn’t always the wisest move. But that’s not really what the OP is about.
^^ This is the part that should be of concern, IMHO.
They may not be the first to make stupid financial decisions but they are nearly the youngest to make them.
I think a closer look at these is warranted again.
Say you are not eating out, not doing much socially, and are not buying any new clothes - how do you answer these questions? I would say no because I am already living at the least expense I can. Yet, if that is the case with a lot of those surveyed, this completely changes the interpretation. I don’t think assuming that 20 something’s in debt are living relatively inexpensive lifestyles is a wild assumption.
As someone else previously mentioned, overlap here is important too. Being willing to cut everything versus some things vs nothing is a big difference.
In general, I just find those numbers misleading.
This part is concerning, and financial literacy being taught earlier on would certainly help. I think that should be a basic of high school frankly, and I’m amazed it isn’t in most places.
I do understand how interest works, but the interest rate on my loans is so low that the additional years I’d pay don’t add that much more interest, especially relative to how much I owe. Given how much I owe in loans (around $38K) and what my interest rate is (something like 5.6%), my current monthly payment is just over $400. If I wanted to pay it off in half the time - 5 years - I would have to pay $727 a month, which is an extra $300. That would save me about $6,000 in interest. An additional $300 a month in my retirement account for 5 years, though, will grow to over $22,000 by the time I retire. Even contributing only half that ($150/month) would still grow to be more than the interest I’d save by nearly doubling my student loan payments.
Even if I just stacked the extra $300 a month in my savings account with a small return (1%, compounded monthly) for those 5 years, I’d save way more in that bank account than the interest I would save by paying the loan down, and then I’d have some money for emergencies. Again, even saving half that ($150/month) would eventually save me more money than the interest I would save.
It doesn’t make as much financial sense for me to pay that loan down as it does to save or invest even a smaller amount of money into something else. Even my money basically just sitting in a savings account is a better idea, financially, than me paying my loan down faster. The only way it might get kind of dodgy is if I had a whole lot of debt and an extended payment plan - beyond 20 years.
@juillet -
If the interest rate on your student loans is 5.6% and your employer does not match, you are probably better off paying the student loans than sticking the funds in an IRA.
If you are paying 5.6% for the loan, and getting 1% in the savings account, why would you think you would be better off keeping the money in savings?
I don’t know exactly how it all works, but you also have to consider “paid ahead” status when you make extra payments on student loans, depending on your lender/servicer. Since interest accrues daily, and you always have to pay interest before any of your payment goes to principal, making extra payments on student loans may not always work how you think they will, depending on how much your extra payment is in comparison to your interest accrual and your ability/desire to continue making payments. Student loans just work differently than other consumer credit, which I don’t think a lot of people, whether they have student loans or not, understand when they start to talk about how others should pay down debt.
My student loans have a 2% interest rate. Why in the world would I pay them off early?
@juillet: I understand the logic of not paying down student loans in favor of contributing to a 401k. I still have a small loan from when I got my MBA; it carries a rate of 1.75%…as you can imagine, I’m dragging it out as long as possible.
My original response to address your statement (reproduced below) that basically said you were tired of delaying gratification, and implying that doing so only benefited Sallie Mae. That is what I was responding to; I was not intending to debate the merits of pre-payment of debt. Contributing to a retirement account is most definitely delaying gratification.
Not really, The net cost is really 8%-6.8% = 1.2%.
But here’s the problem with your position: paying down the debt is the equivalent to a 6.8% return, guaranteed.. But the 8% is an assumed rate. You may do better or you may do worse.
But the point is that paying off debt is not a “far more…sacrifice.” It’s only 1.2%, and at a 15% tax rate…
IMO, paying off 6.8% is a no-brainer. Keeping 3.4% education loans, however, is a different calculus.
What? Don’t all new grads get to live like Carrie Bradshaw in ‘Sex & the City’?
http://www.newsday.com/entertainment/sex-and-money-what-it-costs-to-live-the-life-1.880143
Ugh, as a millennial in college this hits home. I had a conversation with one of my friends a few weeks ago, and she mentioned she didn’t know anything about her college debt either. I ended up looking up her information with her, and was horrified to find out that she’s set to graduate with at least 40,000 in debt, PLUS a majority of her loans being unsubsidized and subject to 6% interest rates. And after looking at this, she just kept saying “yeah I know, but whatever, I’m just gonna put it off as long as possible”. She won’t get an on campus job because “she doesn’t want to”. The irony is that I’m the one with a job despite being projected to graduate with much less debt than her.
It’s frightening how bad the denial has gotten in some cases…
I am reluctant to jump on the millennial generation for being unwilling to live frugally enough to pay off their student loans when the generations ahead of them have such a poor track record of living frugally enough to save for retirement. Both situations are short sighted and have serious financial consequences, and both have arisen at least in part from larger shifts in our economy–the collapse of fixed pensions and the disproportionate rise in tuition costs. Both situations require serious financial self-discipline, but it feels hypocritical to critique or find behavioral patterns in one generation alone.
Yes, yes, yes, profparent. In addition to the millenials and the no-retirements, we might include the parents who don’t prepare for paying for college. Just this morning I explained to my younger how the older and I were surprised at all the free spending parents who “couldn’t afford” to pay for their kid’s college. (I actually stuff my extra money into retirement accounts, but that is so I can contribute to college from earnings later.)
Perhaps it is a US tendency or a human tendency, but not enough are saying for the future. That future me remains too elusive. We just don’t care about her.
Eh, I think it far has less to do with frugality and more to do with not putting a high enough value on education, and/or having [unrealistic] expectations that education should be “free” to them. I think most millennials are actually quite good with money, but many feel that certain things like education should be free (whether or not you agree with that is a whole nother story). Perhaps they are passive aggressively reacting to having to pay back these loans by either not paying them, or doing so whenever it’s convenient for them. I think there is a general attitude of “what’s the worst that could happen to me?”… they feel confident that the government will find another way to get the money back, and that taxpayers will understand their plight and let them off the hook.
Isnt the biggest impact over the last few decades on default rates and loan amounts driven by the FOR PROFIT “University”? I think if you ignore those schools and their borrowers it looks more historical by comparison - although still rising much faster than inflation. Taxpayers are funding the profits of these places and the most vulnerable (low performing students and financially poor students) are becoming victims to their greed.
Well, I started talking about retirement accounts because that was the thing that had the most tangible monetary benefit to not pre-paying loans quickly.
That said, I think most young people would rather balance paying off their loans quickly with being able to enjoy their money while they’re young. What that balance is depends on who it is: some people would rather move in with their parents and eat rice for 3 years so they can pay down their debt very quickly; and some people would rather live a little bit less frugally. My objection was to the idea that the people in the latter group don’t realize that means they will be paying more interest in the long run. In fact, I think they do know, and I think they believe that being able to live independently and have a few more nice things is worth the extra interest. (Of course, there are some extremes - obviously stretching out your loan over 30 years if you don’t have to just so you can buy the luxury BMW is not a great idea…)
@zinhead - My employer does match. The match is very generous (50% of whatever I contribute up to the IRS annual max).
I said why in my post - partly because the savings in interest paid if I paid it off early would be less than the total amount that I could save in 5 years if I squirreled it away, but mostly because it’s important to me to have an emergency fund because I don’t have family resources to rely on in case something goes wrong. (I used a loan calculator to figure out the first part, although please let me know if I’ve miscalculated somehow.)
Reminds me of the drug ad from the 80’s: “I learned it from you dad!”
The country is 19,000,000,000,000 in debt.
That is around 59,000 for every citizen, so this college debt is nothing.
Numbers are kind of fuzzy anyway. Is that the average per millennial or per millennial that has debt (since around 20% don’t have any debt)?
This article did not define its terms at all.
You may do better or you may do worse, but for 20somethings, regular market fluctuation is almost irrelevant. I may “lose” 50% of my retirement accounts next year, but two years after that, those same accounts may double. In the long run, over the course of 40 years, a diversified, age-based risk tolerance will help you.
The net cost is only 8%-6.8%=1.2% under the conditions that a) the 6.8% is non-deductible, and b) you plan to access your retirement funds the same year you pay off your student loans. Even though there is a relatively small differential, you are still better off contributing to retirement than paying off loans early.
Here’s my logic: Suppose you have the ability to pay $400/mo for retirement and loans combined, you have $30,000 in loans at 6.8% with 120-month repayment terms (let’s ignore the possibility of a rate reduction for on-time payment). Your minimum monthly payment is $345.24. Suppose you put your extra $55 plus your tax savings due to student loan interest toward loans so that they can be paid off early, and you divert all $400/mo to retirement for the remainder of your 120-month term. In this case, you would pay off your loans after 94 months and then be able to dedicate all $400 toward retirement. After 120 months, assuming 8% average rate of return (which, for a twentysomething, does NOT require taking too much risk), you will have $11,390 in your Roth IRA. If, on the other hand, you put the extra $55 plus tax savings into a Roth IRA right away, taking the full 120 months to pay off your loan, you will have $12,840 in your account - roughly 13% more than you would have if you paid your loan off early. That 13% continues over the remaining 30 years of your working life - at the 480-month mark, early payoff results in $124,560 whereas on-time payoff results in $140,420, a difference of $15,860.
If you are fortunate enough to have the ability do both, then it makes sense to pay ahead and to contribute to retirement, especially if you can max out a Roth IRA and/or 401k account contribution. Now, if you have private loans with a rate of 10%+, then it completely makes sense to get rid of those loans more quickly since, even considering tax incentives, it costs more to contribute to retirement than not to do so.
Regarding why someone would want to put money into a 1% savings account (which, as far as I know, is pretty high for current standards) instead of paying down loans, let’s keep with our example from above. If $400 is available for loans/retirement, let’s say there’s another $100/mo available for either loans or emergency savings. Let’s say that you use that extra $100/mo to pay down your loans even sooner (71 months instead of 94 months). You are diligent and trying to get rid of those loans, but after month 36, your car is stolen (assume you are one of the relatively few people who needs to drive to work); you have a policy with a $1,000 deductible, so you need to pay $1,000 out of pocket (and take a downgrade on a replacement vehicle, due to depreciation). Because you have been paying the extra $100/month toward your loans, you do not have $3,600 in a savings account, and you are left to take out a personal loan (at 9% of non-deductible interest) or use a credit card (at 16% of non-deductible interest), even factoring in the likelihood that you would be able to skip a month of payments since you had paid ahead.
When you factor in the incentives for on-time payment, paying over a longer term makes more sense. If you get a 2% rate reduction, putting your loan at 4.8%, your effective rate could be as low as 3.6%, if you are in the 25% tax bracket. And, of course, if your income exceeds deduction limits, that makes paying down debt more financially advisable.