The impact of inflation on employees’ ability to pay for household essentials (noted by an increase in credit card payments without an ability to make payments) and the return of student loan payments may combine to be a perfect storm on retirement saving. Impacts could include more hardship withdrawals or even as severe as wanting to cash in their retirement savings entirely.
A perfect storm occurs rarely, when two or more meteorological events come together to create disastrous effects much more so than if the two events had happened individually. It’s a phrase used so often now, that it may have lost its meaning, but the impact of student loans coming due at the same time as a significant amount of bad debt written off by credit card companies may just be one of those rare, disastrous situations.
In late June of 2023, the Supreme Court finally ruled on plans to eliminate (or sharply reduce) student loan debt. “A sharply divided Supreme Court on Friday effectively killed President Joe Biden’s $400 billion plan to cancel or reduce federal student loan debts for millions of Americans.”[1] While President Biden stated he would fight on with his plans and within a few weeks issued a press release stating that the federal government would forgive direct loans that qualify for forgiveness. That includes only loans where the borrower has paid for the required forgiveness period, usually 20 years. It does not include privately held student loans. While the Biden Administration, through a press release issued in mid-July, stated they would notify borrowers by email, many Americans with student loan debt may not yet know whether they will qualify for forgiveness due to how their loans are held. In essence, this $39 billion in Federal student loans will impact only those who began paying, at the latest, on loans in 2003 (there are other exceptions involved).[2]According to the Biden Administration, this may impact approximately 800,000 Americans. However, 43.5 million Americans have student loan debt, ergo, this is less than 2% of all student loan holders will be affected.
For many Americans, the Supreme Court ruling meant they had to return to paying on those loans, payments that had been delayed since the start of the pandemic. In the Fall of 2023, the loans will first begin accruing interest again (in September) and then later (in October) become due. Many Americans may have thought at least some of their debt would be forgiven or eliminated.
News outlets and analysts have already begun considering how the return to student loan payments could impact the economy. Estimates range on the impact of the return of student loan payments, with some saying it could cause a recession and others saying it may take tens of billions out of the economy.[3] It may also be true that the change in surplus income for some Americans cause by the return of student loan payments may remove some of the “entertainment” investors that had been behind some of the unusual behavior of the stock market since the beginning of the pandemic.
Student loans have a drastic impact on retirement income. According to AARP “In 1989, 3.1 percent of families headed by someone age 50-plus carried student loan debt, owing an average of $10,073. By 2016, 9.6 percent of families headed by someone age 50-plus carried student loan debt, with the average amount owed more than tripling to $33,053.”[4] As we noted in an article at the beginning of 2023, “In fact, student loan debt among retirees is numerically lower, but the debt that is held has an increasing delinquency rate. Federal policies require that retirement benefits, like Social Security, can be withheld to pay delinquent loans.”[5]
In sum, the impact of student loan payments on employees’ retirement savings will be immediate and impactful. While that trend may howl like wind through budget worksheets and retirement planning for many employees, it’s not the only storm coming. Instead, there has been a rapid turnaround in credit card payments that may signal other budgeting issues.
In January of 2023, large credit card banks, Like Barclays, reported favorably on how consumers were paying down credit card debt during the recession. At the same time, federal reserve data indicated a decrease in consumer loans, of about 3%.[6] By the end of 2022, many banks were reporting strong results. Earnings were up, defaults on consumer credit cards were down. [7]
That has changed. According to reporting from the Financial Times, “lenders are starting to see the negative effects of higher rates and inflation on borrowers.”[8] The FT went on to say that banks have already written off approximately $5 billion in defaulted loans in the second quarter of 2023 and estimate an additional $7.6 billion may be written off in the remaining quarters of the year. By way of comparison, the FT stated “Both figures are nearly double what they were in the same quarter a year ago. However, they remain below the hits big banks took at the beginning of the pandemic when charge-offs and provisions peaked at $6bn and $35bn respectively.” Consumer loans represent the largest amount written off debt. Consumer spending during the inflation outstripped consumer earning, and even with a dip in inflation reported in the Summer of 2023, it’s clear that consumers were struggling to make ends meet. This trend may have caused many employees to decrease the amount they were saving for retirement, if not delay saving entirely. Once a debt is written off by a bank or credit card company, the impact on a consumer’s credit may begin. That may mean increasing calls from debt-collection agencies and/or negative credit score outcomes.
The impact of inflation on employees’ ability to pay for household essentials (noted by an increase in credit card payments without an ability to make payments) and the return of student loan payments may combine to be a perfect storm on retirement saving. Impacts could include more hardship withdrawals or even as severe as wanting to cash in their retirement savings entirely. Sponsors may want to get ahead of both storms by ensuring their benefits staff are well versed in the new requirements for hardship withdrawals and when changes to the regulations on withdrawals brought by the Secure 2.0 Act take effect.
[1] https://apnews.com/article/student-loan-forgiveness-supreme-court-653c2e9c085863bdbf81f125f87669fa
[3] https://www.axios.com/2023/07/10/student-loan-payments
[4] https://www.aarp.org/money/credit-loans-debt/info-2021/student-debt-crisis-for-older-americans.html
[5] https://www.bcgbenefits.com/blog/unpaid-student-loans
[6] https://www.reuters.com/article/us-usa-banks-results-preview-idCAKBN26M5VA
[7] https://www.nytimes.com/2023/01/13/business/bank-of-america-wells-fargo-earnings.html
[8] https://www.ft.com/content/9a7e9746-516b-4d37-a966-97259ec8aca6
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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