Recent research from the New York Federal Reserve has shed light on a persistent but little-discussed problem: The heavy debts owed by many of America’s retired population.
This is an issue that has skyrocketed in recent years. Debt held by borrowers between the ages of 50 and 80 increased by roughly 60 percent from 2003 to 2015.
More concerning for older Americans and their financial advisors is that much of this indebtedness arises stealthily. It’s not because of wanton use of credit cards, but generally because of borrowing that occurred much earlier in life. In fact, the New York Fed reveals that older borrowers hold higher per capita balances in every debt category except for credit card debt. Even auto loans have been soaring for older Americans: The average 65-year-old borrower held 29 percent more auto debt than the same cohort had in 2003.
Given the havoc that excessive debt can play on retirement planning, estate planners would be wise to keep an eye on these factors, not just for their older clients, but the younger ones who want to avoid these debts later in life. Here are the key factors that the New York Fed found:
It’s counterintuitive to think that older Americans would carry more student debt than they did years earlier, but that’s exactly where we find ourselves. The amount of student debt held by Americans age 65 and older reached $18.2 billion in 2014, up from just $2.8 billion in 2005, according to the Government Accountability Office. It’s not the case that people have been burdened by taking out loans to help their children or grandchildren attend school, either. More than 80 percent of that debt consists of loans taken for the borrower’s own education.
Roughly 150,000 Americans had a portion of their Social Security garnished last year to pay down student loans. And it’s not just people who are struggling financially who are saddled with all this debt. Bloomberg News uncovered a 67-year-old man, Eric Merklein, who was stunned to discover that $300 was garnished from his first Social Security check. Merklein had thought his grandmother had paid off his student debts, but the government thought otherwise.
Even worse: The debt that Merklein had originally owed to Southern Illinois University, $3,750, had grown to $21,118 over the years because of interest and default fees.
Protect Your Clients: If your clients are unsure whether they are trailing any student debt, the Department of Education offers a National Student Loan Data System at www.nslds.gov, where anyone can search for student loans and balances, as well as find the names and locales of the loan servicers.
Conventional wisdom holds that by the time people reach retirement, they will have paid off their mortgage. But that no longer is true. The housing bubble that developed in the early part of the last decade led many people to buy larger houses then they needed, and the subsequent recession left many of those people unable to pay for them. Older Americans were affected as much as anyone — maybe more so.