Data & Research May 23, 2011

Graduates Advise Saving Early for College Costs

Although two-thirds (66%) of the Class of 2011 who are graduating with debt say the value of college is worth the cost, one-quarter say they would have made different choices if they had thought more about potential future debt.
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According to the Fidelity Cost-Conscious College Graduates Survey, this sentiment is even higher for graduates from the Classes of 2009 and 2010, with nearly 40% responding that they would have made different choices to lessen the amount of debt they accrued.  

A key lesson college graduates suggested for high school students in preparing for the cost of college is to save early, according to a release of survey results. One-third of those in the Class of 2011 report having a dedicated college savings account, but a larger number reported having no college savings (44%), which could account for the high debt levels.  

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Graduates who had saved in advance for college were able to cover more than half (52%) of their college costs. Those who had not saved from all of the classes surveyed had an average of $56,000 in debt and were significantly less likely to believe that their college experience had prepared them well for getting a job.  

“While these recent graduates may not have made the decisions regarding their own college savings, 56% of them said they would ‘definitely’ open a dedicated college savings account for their children,” said Joe Ciccariello, vice president, Fidelity Investments College Planning, in the announcement. “That number climbed to 70% for those graduates who had savings, indicating how much they valued their parents’ advanced planning.” 

Forty percent of all graduates who had saved for college reported that their families had worked with a financial adviser to help prepare for the cost. These families were three times as likely to have 529 College Savings Plans and carried 20% less debt than the average graduate.  

The survey reveals that among the Class of 2011:

  • 61% have government loans with an average debt of $16,800;
  • 32% have private loans with an average debt of $14,200;
  • 37% have credit card debt on average of $3,600; and
  • 17% have other debt (e.g. family loans) averaging $5,300.

An online survey among a national sample of 549 college graduates was conducted by ORC International, an independent research firm, from April 1 - April 7, 2011. Of the total sample surveyed, 250 students graduated in 2011 and 299 graduated in 2009 and 2010.

IMHO May 23, 2011

IMHO: Loan Arranging

The headlines last week were all about how new legislation had been introduced to cut down on the “leakage” from 401(k) plans. 
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That leakage, roughly defined as pulling money out of retirement savings before retirement, has been a concern of many for some time.  About once a year, someone puts out a report about the number of outstanding loans from these programs and/or the uptick in hardship withdrawals (see IMHO: Double Dipping); and, from 2008, see IMHO: Safety “Net”).  Not surprisingly, with the sluggish U.S. economy and the so-called jobless recovery, people seem to be dipping into these accounts at higher rates.  And yet, for all the hyperbole around such things, the actual rate seems to be pretty consistent (allowing for differences in the data samplings). 

That said, last week, Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (the SEAL Act), which, among other things, was designed to “[limit] the most 401(k) loan practices that provide easy access to retirement funds but adds costs and fees to pension plans” (see “Legislation Aims to SEAL 401(k) ‘Leakage’”). 

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From the bill’s summary, the only real “limitation” on loans was capping the number outstanding at any one time to…three.  Beyond that, it gave participants longer to stave off having an outstanding loan turned into a “deemed distribution” (a euphemistic term for treating that loan you previously took out as a distribution and subjecting it to income taxation), and it allows participants to continue making contributions after taking a hardship (the current six-month restriction being a vestige of the sense that if you could afford to keep contributing after taking a hardship, you really weren’t in a hardship situation).  The SEAL act would ban 401(k) loan debit cards—but did anyone ever think THAT was a good idea?   

Now, I’m sure that keeping those repayment windows open longer will compound someone’s recordkeeping headaches, but it seems to me a reasonable means of giving participants time to restore that money to their retirement accounts, rather than simply forking over a big chunk of it to the IRS.  Moreover, I think we all know that a properly administered hardship request can alleviate the hardship without imposing a six-month “penalty” on retirement savings (and matching contributions).  As for “only” letting participants have three loans out at one time—well, IMHO, that’s hardly a limit at all. 

In fact, headlines notwithstanding, the bill might have been more accurately (if less acronymically melodic) titled the “Making It Easier for Participants To Repay Outstanding Loans and Keep Saving” bill. 

All in all, the legislation may or may not actually forestall 401(k) leakage, but IMHO, it’s certainly a plumber’s helper. 

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