Student Loans Delaying Retirement Savings for Millennials

When asked how they would divert excess funds if student loans were hypothetically absolved, 31.68% of Millennials said they would save for retirement, according to a new survey.

The average student loan debt for the American Millennial is $27,162, according to a survey by online loan marketplace LendingTree. The average monthly student loan bill rings in at $317.

For many Millennials, student loans are delaying important financial decisions. The most frequently cited include saving for retirement (38.7%), buying an automobile (44.74%), purchasing a home (45.31%) and traveling (53.27%).

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When asked how much student debt affects spending ability, 30.54% answered, “Very much;” 30.40% answered, “Somewhat;” and another 14.91% said “very little.” Slightly less than one-quarter (24.15%) reported that their student loan debt had no effect on their spending habits.

LendingTree’s research also offered some insight into how Millennials would treat excess funds if student loans were hypothetically absolved. Respondents said this money will go toward saving for emergencies (53.98%), buying a home (41.76%), saving for retirement (31.68%), or travel and vacations (31.25%).

According to LendingTree’s research, the average salary for employed Millennials is $48,146. When considering factors such as taxes, Social Security payments, and insurance costs, the average Millennial is taking home 70% of gross income or $2,808 per month in this example. The study also found that student loan debt consumes about 11.3% of the average Millennial’s net monthly income.  

More than half (55.9%) of those surveyed have feelings of financial regret related to their post-secondary education. The most common is that he or she wished they went to a more affordable school (29.05%), followed by wishing they chose a different major or area of study (20.81%), or feel they should have attended a different school for their money (14.05%). 

In addition, 10.4% feel as though they shouldn’t have attended college at all, and 10.14% feel they are overeducated and paying for education beyond what is necessary for their career.

Still, the study found that several students tried to minimize the burden of student loans before even deciding to go to college. For slightly more than half of respondents (50.6%), potential student loan debt determined where and what they decided to study. The survey also found that 15.06% said they were accepted to “better” schools but couldn’t afford to go there. Another 33.2% said they didn’t apply to “better” schools because of the cost of attendance and potentially having more to pay in student loans.

These findings are from a survey of 1,338 Millennials, defined as those born between 1980 and 1995, who enrolled in at least some post-secondary education. According to the survey, 63.3% of this group graduated or will graduate with student debt, and 46.5% currently owe student loans.

Lower DB Funding Not Solely Driven by Lower Interest Rates

An analysis suggests discount rates are likely not the driving force behind different funding levels, despite the general belief lower discount rates produce greater liabilities.

When it comes to funding defined benefit (DB) pension plans, it is commonly understood that the discount rate used to compute liabilities plays a significant role, as a lower discount rate results in a higher liability, which could lead to a lower funded status.

“Discount rate” refers to the interest rate used to compute the present value of future benefit payments.

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The Society of Actuaries (SOA) did comparisons from 2009 to 2014 of all three major categories of defined benefit pension plans in the United States: single employer (SE) plans, multiemployer (ME) plans, and state and large city public plans (PP). Reflection was limited to the question of whether discount rates were driving the differences in funded status, without any attempt to explain why funded status differs.

The SOA found SE plans averaged the lowest discount rate at 6.8%, followed by ME plans at 7.4% and PP plans at 7.74%. PP plans had the highest discount rate and the highest total unfunded liabilities, while on average, SE plans have the lowest level of unfunded liabilities despite utilizing the lowest average discount rate.

Although the category with the greatest discount rates (PP) was the least well-funded, statistical analysis reveals that discount rates were probably not driving the differences in funding levels. While they are not explored by the SOA, many other factors involved in pension plan funding also differed among and within pension plan categories, including methods for computing unfunded liabilities, overall approaches to plan and risk management, and the way that contributions are determined.

The SOA notes that DB plan funding levels can be impacted by inadequate contribution levels, varying investment returns and plan funding analyses that do not respond fast enough to changing market conditions, among other factors.

A download of the analysis report is available here.

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