Within 24 hours last month, The Hill proclaimed “Student loans really are making millennials go broke,” while the BBC asked, “Are millennials on track to become the richest generation?” How can both be true? It depends who you ask and how far ahead you look.
Top economists at the Royal Bank of Canada and UBS aren’t accepting a thesis that has united Betsy DeVos and Elizabeth Warren – that $1.5 trillion in student loan debt is a looming disaster for individuals and the government. The debt-saddled just have to wait for their parents to die. But for those trying to obtain financial solvency in the present, or those without rich relatives, this picture is bleak.
The Rosy-ish future outlook
In January 2018, UBS economist Paul Donovan told Business Insider “It’s worth pointing out that the millennial generation, which we’re all wringing our hands about — these poor people not able to own houses! — this is going to be the wealthiest generation ever that we’ve experienced.”
Wealth, Donovan argued, will not simply disappear. Since baby boomers and Gen Xers with money outnumber the younger generation that lacks it, it stands to reason when millennials inherit the earth they will also inherit its wealth.
The Royal Bank of Canada’s Wealth Transfer Report from December 2017 seconds the notion that the largest generational wealth transfer is impending. However, this report took a more cautious tone, pointing out the majority of families fail to plan accordingly for death and pass on financial education to their children. Unless this behavioral trend is corrected, intended beneficiaries may find themselves out of luck and actual beneficiaries may find themselves unprepared to cope with the responsibility of newfound money.
More worrisome: the present
An aging population means parents and grandparents are taking longer to die, postponing the predicted windfall. The longer they live, the more money they spend and the less their heirs inherit.
Meanwhile, millennials are facing unprecedented levels of debt. While previous generations were starting at zero and from there accumulating wealth, the workforce’s youngest generation is fighting to hit zero. Rising tuition costs correlate to negative wealth, making each years’ influx of college graduates further and further behind. Unsurprisingly, that puts them behind in terms of asset accumulation.
The St. Louis Federal Reserve’s Demographics of Wealth claims that in spite of a robust economy as of 2016, those born after 1960 were less likely to have recovered from the 2008 financial crash. More disturbing, those born after 1980 are earning 34 percent behind the benchmark set by previous generations. In large part, this is because debt accumulated by those born before 1980 took on debt later on tangible assets that have appreciated (i.e. houses) whereas those born after stacked up debt on something intangible, earlier that should appreciate, but has not yet: education.
Making matters worse
One of the United States’ top three student loan servicing companies may have been exacerbating by the student debt crisis, according to a 2017 Department of Education audit procured by the Associated Press in November.
Naviant Corp is currently being sued by five states, as well as the Consumer Financial Protection Bureau for steering customers into costly plans for the sake of turning a profit.
The audit indicates Naviant overissued forbearance plans – a practice that allows students to temporarily suspend debt but ends up costing more in the long run since the debt still accumulates interest. Furthermore, the company was found to not always ask questions to best ascertain the borrower’s financial state, or explain all available offerings.
Navient has disputed the audit’s findings, arguing their contract with the Department of Education does not require them to list all their offerings, telling the AP “We (are not) aware of any requirement that borrowers receive all of their repayment options … on each and every call.”
While it is unknown how many student-loan holders Naviant persuaded to adopt a forbearance plan, the Consumer Financial Protection Bureau alleges the interest added between 2010 and 2015 was approximately $4 billion.
It might just work out, though
In spite of behind the pace wealth accumulation the Federal Reserve of St. Louis isn’t convinced the future needs to be doom and gloom – or that salvation will come in the from deceased relatives.
Instead, millennials might be able to save themselves. “Two reasons for optimism are that the 1980s cohort has many years to get back on track and it is the most educated — hence, also potentially the highest-earning — group ever.”
An inheritance isn’t a guarantee to wipe out your debt. If you’re struggling with student loan debt, check out Debt.com’s Student Loan Debt Solutions.Get Started
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