With Generation X coming within screaming distance of retirement, with its oldest members only four years away from the age at which they can start drawing Social Security, these Americans’ retirement plans can be disrupted by debt, especially as student loan payments come to a halt. It’s coming to an end.
Generation X is classified as those born roughly from 1965 to 1980, which means the oldest members are 58 — only about a year or so away from being able to withdraw retirement money without penalty, and less than a decade from eligibility for a medical care.
As of the first quarter of this year, members of Generation X owned about a quarter of the nation’s $1.6 trillion in outstanding student loan debt — roughly $49,000 per borrower, according to credit reporting bureau TransUnion. And this fall, people will need to start paying those balances again. Starting in September, the loans will resume interest, and payments will be due in October, the first time since March 2020.
For people like Renetta Thompson of Washington, D.C., the approaching deadline makes planning ahead more difficult. Ms. Thompson, 51, has a bachelor’s degree in human resource management and owes between $75,000 and $80,000 in a mix of federal and private student loans.
Ms. Thompson said she was able to use the three-year hold on student loan payments to pay off some other debts. She said completing a debt management program with a credit counseling organization, GreenPath, allowed her to pay off nearly $15,000 in credit card debt.
“When I get the degree, I think it will raise my salary,” said Mrs. Thompson. But she estimated that she still had another three or four years before paying off the rest of her student loans. “It’s going,” she said, “but not as fast as I thought in my mind.” “As I get older, I wish I would have thought of this earlier.”
This is a common pitfall, said Trent Graham, financial advisor at GreenPath. “In general, we’ve seen clients focus more on savings and less on student loans,” he said. “They didn’t really have a plan to process these student loans.”
Many borrowers were surprised, Mr. Graham said, when they realized how much student loan debt could grow, because it continued to accrue interest even if the borrower deferred or assumed the loan. (Loans under forbearance still accrue interest, while deferring subsidized loans stops accruing interest.) The pandemic stoppage was an exception in this regard, suspending accrual of interest as well as monthly payments.
“I don’t think they understand the implications of the interest being charged on that debt over time,” Mr. Graham said. “We find that a lot.”
Higher college costs, lower pensions
Generation X faces a frustrating confluence of social and economic trends. In the workplace, these employees were the first to begin to replace defined-benefit pensions with defined-contribution retirement plans such as 401(k)s.
“The biggest shift it makes is that it puts more of the burden of saving for retirement on them,” said Tyler Bond, director of research at the National Institute for Retirement Security, a nonprofit research and policy organization. “When you think about the impact of student loan debt on retirement savings, that’s where that crossover begins,” he said.
At the same time, Generation X was attending college just as the cost of higher education was shattering a decades-old pattern of stability. Data from the Department of Education’s National Center for Education Statistics show that, adjusted for inflation, college tuition fees remained stable through most of the 1970s and into ticked down some yearsAnd But in the early 1980s—just as the older generation started graduating from high school—those expenses started to climb, and they haven’t stopped.
Studies have found evidence that student loan debt can hurt how much people save for retirement. In 2018, researchers at the Center for Retirement Research at Boston College found that while student debt didn’t stop young people from signing up for a 401(k) account, it did affect how much they contributed to it.
Borrowers are able to save less, regardless of how much they owe, said Matt Rutledge, associate professor of economics practice and research fellow at the Center for Retirement Research.
“It’s the existence of any loan at all; if you have one, you probably think you don’t have the bandwidth to think about retirement yet.
This has a significant impact on the members of Generation X, who number about 65 million Americans, as they reach their peak earning years. “For people who’ve been holding these loans for decades, they probably didn’t save much to begin with, so you’re really wasting some of their best saving years,” said Mr. Routledge.
mired in debt
There are other indications that many members of Generation X have come to the brink of retirement financially unprepared. The Transamerica Center for Retirement Studies found that although about 80 percent of Gen Xers save, each contributes only 10 percent of their annual earnings and, on average, has an $82,000 balance in a 401(k) or retirement account. the like. As a general rule, many experts urge savers to set aside 15 percent of their income, and some planners recommend that savers have six times their accrued salary for retirement by age 50.
An annual study by Northwestern Mutual found that 55 percent of Generation X don’t think they’ll be financially prepared for retirement.
Those borrowers faced unattractive choices: work longer, or live on less in retirement, said Christian Mitchell, chief client officer at Northwestern Mutual.
“Retirement is theoretical,” he said, “until it doesn’t happen.” “What’s probably exacerbating the situation here is all the economic turmoil we’ve seen over the past few years.” Over a generation in the peak years of earnings, the disruption of that momentum, when millions of jobs were lost during the pandemic, could lead to fiscal deficits that are difficult to recover from.
The truth is that a certain number of these borrowers will likely have to work longer and live more frugally, especially because student loans, unlike other types of unsecured debt like credit cards and medical debt, cannot be easily discharged in the event of bankruptcy.
Reconciling the costs of the children themselves
Overall, Generation X already carried a significant amount of debt: Online lending platform LendingTree found that this age group had the highest amount of mortgage and other debt, averaging over $167,000 per borrower. The high interest rates that borrowers pay today, a function of the Fed’s fight against inflation, make it difficult to repay variable-rate debt, as a greater amount of each monthly payment goes to servicing the debt itself rather than paying down the principal. .
“It has a bigger impact on their overall budget, which means it’s more difficult to cover other expenses,” Mr. Graham said.
The burden of student debt threatens to exacerbate income and wealth inequality in American society, as these borrowers must choose between paying for their education and saving for their children’s college expenses.
Terrell Grant, a health care worker who runs a home care agency in Sacramento, is putting money into a 529 account to help fund college for his two children, ages 12 and 10, even though he works two jobs to make roughly the payments. $110,000 he borrowed to obtain his bachelor’s and master’s degrees.
Mr. Grant, 40, a first-generation college graduate, said he did not regret the investment in his education, but conceded he had to reset his expectations for retirement.
“I hope to work until I’m 55, but the way things are, it’s more like I’m 65,” he said, adding that he’s getting his kids to consider educational opportunities that don’t require borrowing. “I try to educate them,” he said, “about the long-term ramifications of student loan debt.” “If they can avoid being taken out, that would be ideal.”
“I pray it’s not too crazy”
In addition to the financial burden, experts say carrying student loan debt into adulthood can take a toll on borrowers’ mental health.
“Preparing for retirement is a huge concern,” said David Simula, assistant vice president of the Wealth Management Group at SAFE Credit Union in Sacramento, where Mr. Grant banks.
In its study, Northwestern Mutual found that only about half of Gen X survey respondents believe they have or will achieve financial security, which is five percentage points lower than respondents across all age groups. Generation X participants also expressed less confidence in their prospects for career success and their ability to plan for unexpected events or emergencies than the overall respondent group.
“Debt, by and large, is a concern for Gen Xers,” said Mr. Mitchell of Northwestern Mutual. “To the extent that some of them are still carrying student loan debt, I think it could be a flashpoint and a benchmark for broader concerns about retirement.”
Adding to the general concern is the uncertainty student loan borrowers feel about the amount of the monthly bill they will face when resuming their payments.
“I pray it’s not crazy,” said Ms. Thompson, the Washington recruiter. She said she was financially and mentally ready to pay up to $500 a month, but worried how she would manage if the payments turned out to be higher. “I hope it’s not more than that,” she said.