The college debt crisis in America continues to grow, with more than $1.4 trillion in student loan debt outstanding. In fact, college loans are now the second-largest source of household debt, according to a Brookings Institute study. Student loan debt is the only form of consumer debt that continued to grow in the aftermath of the Great Recession, one decade ago.
The rapid increase in annual tuition and fees at four-year colleges from 1995 through 2015 caused thousands of baby boomers to take on loans or spend down their retirement savings in order to help put their kids through school.
This debt management problem now poses a real challenge for many advisors who are trying to guide their clients with retirement funding strategies, because it serves as a drag on retiree cash flow, making it difficult to free up the monthly income needed to finance their clients’ retirement lifestyles.
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The college debt burden is one contributing factor behind a larger retiree debt problem in the United States: Nearly 50% of American families in which the head of the household is age 75 or older were carrying debt in 2016, up sharply from 31% as recently as 2007. The numbers are even more sobering for American households led by adults over the age of 60, who hold debt that is approximately 80% of their total annual income. This is nearly four times the amount that the average 60 plus household carried in 1989.
Of course, some of the sting of the impact of carrying debt in retirement is mitigated by the sustained low interest rate environment in which we have been living for the past two decades. And the 12-year bull market on Wall Street has lifted retiree investment portfolios so much that even a 50/50 stocks-to-bonds asset allocation has generated returns that have outpaced inflation and enabled some retirees to increase their annual withdrawal rates to stay current on their loan balances. But there is very little debate over this basic premise: retirement planning experts advise against retiring with debt and, if that is not realistic, to wipe out at least the “high-cost” debt as soon as possible.