17 may 2019





WITH RECORD HIGH STUDENT DEBT, SOME GOOD NEWS FOR GRADS





Senator Ron Wyden (D-OR), left, introduced a bill to let employers match student debt payments to their employees' 401(k)s.


By Raul Elizalde

This article also appeared on forbes.com


Among the Class of 2018, 69% of students took out loans, graduating with an average debt of $29,800. And 14% of their parents took out an average of $35,600 in federal Parent PLUS loans. A total of 45 million Americans owe a staggering $1.5 trillion in student loan debt, which is 50% more than what they owe on their credit cards.


Repaying those loans is a big burden on young people entering the workforce. The average monthly payment is close to $400, or $4,800 per year. Little of this is tax deductible, since the IRS only allows a deduction on the interest portion of the payment. Close to 12% of student loans, or almost 1 in 8, are 90 days delinquent or in default.


College graduates make, on average, about $50,000 per year on their first year, which at first glance may seem enough to make their student loan payments. But the $50,000 represents wages before taxes, while the $4,800 loan payment is almost entirely an after-tax burden. This means that in a high-tax place like New York City, where the total tax load (including Federal, State, City and Sales taxes) approaches 50% of gross wages, student debt payments could easily reach 20% or more of after-tax income.


No wonder, then, that for some young workers saving is an impossible dream. Adding insult to injury, those who do not contribute to employer-sponsored plans such as 401(k)s and 403(b)s lose out on employer-matching contributions. This further widens the savings gap between those who find it impossible to put money on their employer plans due to their student loan payments and those who are able to do so.


A bill that was recently introduced in the U.S. Senate aims to eliminate that discrepancy.


The Retirement Parity for Student Loans Act, introduced by U.S. Senator Ron Wyden from Oregon, would open the door for student loan repayments to be treated as elective deferrals under an employer’s plan. This means that employees who make payments on their qualified student loans would be eligible to receive company-matching funds on those payments, just as those who make contributions directly to their employer plans.


There are serious problems surrounding the student loan surge, not least the fact that for-profit colleges show the highest proportion of graduating students with loans (75%), the highest average debt burden ($32,300) and by far the highest incidence of default (48%) within 12 years of graduation. Worse, while Federal student loans carry interest rates in the 5%-8% range, private student loans charge as much as 15%.


This raises questions about the for-profit higher education model and how it relates to student loans. Many lawsuits have been filed against student loan servicing companies who are being accused of widespread wrongdoing, and the Consumer Financial Protection Bureau has accused the Education Department of withholding information that would allow better policing of questionable lending practices.


Meanwhile, the Retirement Parity for Student Loans Act is making its way through the U.S. Senate. If it passes, it will be good news for some of those affected by the burden of student debt.