Our College Debt Will Cost Us Our Retirement

The choice to pursue a college degree is an investment, but not just in your future. An investment in a college education is comparable to an investment in a home, a car, or a retirement account, especially for those with student loans. Any single contribution reduces your capacity to invest in another. The problem is, we only realized that after college.

On the surface, pursuing graduate education has a high rate of return in terms of income compared to those who end their education in high school. But the current economy has left us with high youth unemployment and underemployed college grads doing jobs that don’t require a degree. What's worse is that two-thirds of them are in debt, and student loan defaults are at historic levels. These are not good signals for our economy or our generation, but don't worry ... it gets worse.

A recent study conducted by Nerd Wallet found that the student loan debt carried by today’s millennials will delay their ability to retire by 12 years. 12. That means millennials will not be able to retire until the age of 73, just 11 years shy of the average life expectancy age of 84. Time to face the true impact of choosing to spend 10 years (the default repayment option for federal student loans) in debt at the outset of your career.

Let's break down what this means for millennials like us.

My husband and I have been considering buying a home, but before we go putting a significant downpayment on a house and getting a 30-year mortgage, we’re weighing that decision as a portion of our income, understanding how such an investment fits into a family budget paired with other investments. Same goes for our car loan, contributions to our retirement savings plans, and any additional contribution made to other investment accounts. None of these financial decisions are considered alone, and all of them have to be considered together to get a good picture of our financial health as a family.

Neither of us did that kind of serious math before college. I considered college based on projected costs of tuition, books, food, and room and board — you know, everything they put in the glossy admissions brochures. My (future) husband and I worked through plans with our families about how to pay for college, through any combination of savings, work-study programs, scholarships and, of course, student loans. I did not consider, at the outset, taking out a student loan as a function of my future earnings because the two were not occurring simultaneously and the job I needed the degree to pursue hadn’t yet materialized.

Unfortunately, thinking like mine is shortsighted. It is a fundamental mistake for us to ignore the full picture of debt as it relates to our earnings and our retirement.

Where we, as consumers, fail today is in not considering student loan debt as an opportunity cost.

In micro-economic theory, the opportunity cost of any decision is the path not chosen or any benefit not realized. Applied to student loan repayment, college has a growing and significant opportunity cost for millennials and generations to come all tied in with the lost contributions to retirement savings and other investments. A decision to put a scarce resource — and let’s be honest, for many of us, money is a scarce resource — towards taking out student loans guarantees that the money will not be available after college. By not taking that into account when making the initial decision, millennials are not getting the full picture.

Deciding on college is the first big financial decision we make, apart from how many quarters to put in our well-loved piggy banks, and it's one we make at the tender age of 17. To make an appropriately informed decision about college, we have to connect the cost of entering the educational system to the post-college labor market.

A team of researchers from Georgetown University agrees, arguing that underlining the relationship between the degree and the career is critical to students making good decisions given the economic challenges facing millennials. Prospective students need to be able to measure their future earnings against their debt.

In most cases, students pay the same amount for an undergraduate degree no matter the major. Tuition isn’t less for an English major compared to an engineering major, even though the starting salary and cost of providing technical expertise from college staff may be far cheaper. That said, some schools are beginning to insert the labor market into educational decisions by utilizing differential tuition plans to charge more for technical programs that pay better after graduation. While the policy is not without critics, bringing the post-college labor market into the decisions up front for students selecting a major helps invite that perspective into the process sooner. 

If we thought about college in a market-oriented way, many students might consider college more carefully — and it appears some are starting to do so. There’s a growing chorus of those questioning the value of a college degree relative to the job market. College may not be the right decision for everyone, particularly in this job market and with the knowledge that the debt alone can be suffocating.

Just so we're clear, though: Even if we manage to overcome student loan debt and make smart investment decisions, there are still other debt pitfalls that could derail us. According to other reports, 60% of workers are amassing debt at a pace faster than they can save for retirement, and one in four workers are tapping into 401k savings accounts to pay current expenses — an alarming trend for those looking at retirement practices with concern.

Now, I don’t mean to be a total downer.

Millennials may still avoid the depths of debt. Market trends for millennials are towards shareable goods that pool scarce resources — like Zipcars and bikeshare companies — and against long-term debts such as houses and cars. The trend highlights a growing awareness of the cost of goods relative to the benefit they provide, a good thing for our long-term projections, and a better thing for our retirement outlook.

We go to college to realize our potential. and we invest in ownership to achieve the American Dream. What NerdWallet reveals is that these choices may be just as likely to limit our potential and erase our ownership if we aren’t cautious. 

Though the balance between debt today and savings tomorrow is not an easy one to strike, making these decisions with open eyes could help us avoid open, gaping mouths when we calculate at what age we can actually retire.