Squared Away Blog

The share of college students who must borrow to pay for their education has surged over the past decade. Average borrowing per student is also much higher than it was in 2004, though there’s evidence it might now be in decline. Only now is serious research trickling in about the personal financial fallout from the nation’s $1 trillion-plus in student debt outstanding. But one new study reaches an interesting conclusion about the burden of student debt: it “is much greater among non-completers than among those who obtain a college degree.” One reason is that they can’t expect to earn the higher income that a degree confers on a graduate. The study – part of an edited volume published by t…

Due to differing tax treatments, each $1,000 placed into a traditional, tax-deductible 401(k) costs less today than $1,000 placed into a Roth 401(k), but that Roth will provide more money in retirement. New research indicates that workers don’t recognize this difference between the two types of employer-sponsored retirement accounts when deciding how much to save. A $1,000 contribution to a traditional 401(k) costs the worker less than $1,000 in take-home pay, because the income tax hit on the $1,000 will be delayed until the money is withdrawn from the account. But a $1,000 contribution to a Roth 401(k) costs exactly $1,000 in take-home pay, because the worker has to pay income taxes on it up front. The Roth funds, including…

Teen unemployment has shot up in recent years, and their participation in the U.S. labor force has dropped to historic lows. These data were highlighted in a series of recent reports by the Federal Reserve Bank of Boston expressing concern that this trend may have long-term consequences for today’s teens, including lower lifetime wages resulting from their early absence from the labor market. “This is a long-term trend that was going on prior to the Great Recession,” the author of the reports, Alicia Sasser Modestino, a former Federal Reserve researcher now at Northeastern University, said in a recent interview. Last year, nearly 54 percent of teens in the 16-19 age range who were trying to get their first job –…

The general public is very cool on annuities. But many economists like the idea of retirees using some portion of their savings to buy them. Annuities, with their fixed monthly payments, may be the best way to ensure retirees’ savings last just as long as they do. Otherwise, they may either spend it too fast and deplete their savings prematurely or spend too conservatively, depriving themselves of necessities in their old age. New research suggests that one reason retirees don’t buy annuities is because they have great difficulty figuring out what they’re worth. When they try to figure this out, they bump up against their own cognitive limitations – limitations that only worsen with age. In the study, 2,210 adults…

Parents should watch this video with their college-bound children. The young adults featured in “Voices of Debt” have one thing in common: a lack of understanding of the financial implications of debt at the time they were taking out their student loans.  So it’s critical that parents start this conversation early with their children. The compelling video, produced by Manhattan ad agency The Field, speaks for itself.  Similar videos can be found her…

Here’s actually some good news about student debt: borrowing by undergraduates is now declining. Annual borrowing by all full-time undergraduates peaked at $6,122 per student in the 2009-10 academic year and fell to $5,490 by 2013-14, according to the Urban Institute’s new report, “Student Debt: Who Borrows Most? What Lies Ahead?” For its shock value, the media toss around the $1.2 trillion figure – the total of all U.S. student loans outstanding. The institute provides a more refined look at student debt by diving into U.S. Department of Education data to learn who tends to borrow the most and why. The findings are summarized here: ……

As a 20-something working in downtown Chicago in the 1980s, I spent every dime of my disposable income – and then some – on beer and Thai food, vacations, clothes, and parking tickets. Fast forward 30 years, and my niece and nephew in Chicagoland are now graduating college. It’s liberating to leave school for a full-time job and a substantial increase in one’s income after years of penury. It’s also so tempting to squander this money. But young adults no longer have that luxury. The financial demands Millennials will face over their lifetimes are shaping up as far more complex than they were for their baby boomer parents, whose primary worry was buying a house. ……

There’s little agreement on whether personal finance education in the schools is effective, but success with financial education mandates in Georgia, Idaho, and Texas indicates that it is. A new study compared thousands of young adults in these states, which have fairly rigorous mandates, with states lacking personal finance education. This focus on states with very strong mandates departs from prior studies that lumped together numerous states with varying levels of mandates. The researchers also looked at whether behavior actually improved – credit scores and loan delinquencies – rather than simply testing students’ knowledge before and after they took the classes. The three states studied have extensive financial education programs. Curricula in Georgia cover economics, financial institutions, saving, insurance, credit,…

Americans once defined success mainly by whether they owned a house or were better off than their parents. Today, it’s a debt-free college education and a comfortable retirement. U.S. adults feel that their top indicator of financial success is having enough money in the bank to retire (28 percent of adults), followed by sending their kids to college without having to borrow to pay for it (23 percent), according to a telephone survey sponsored by the American Institute of CPAs. Homeownership and upward mobility each came in at a distant 11 percent of the adults, age 18 and up, randomly surveyed by Harris Poll. “No longer are homeownership and upward financial mobility the hallmarks of financial achievement,” said Ernie Almonte, chairman…

The federal minimum wage is $7.25 per hour, up from $1.60 in 1968. Yet it has eroded in terms of what it can buy. Its value has fallen, because, despite more than a four-fold increase in the minimum wage over nearly a half century, it has not kept up with inflation. The 1968 value, when translated into 2014 dollars, was $9.58 per hour, as shown in the chart (left) from the Center on Wage and Employment Dynamics at the University of California, Berkeley. In other words, today’s minimum wage, at $7.25, buys about 25 percent less than it did in 1968. As the federal minimum wage has eroded, Sylvia Allegretto, the Center’s co-director, noted that numerous states and municipalities stepped…

Several new books are pertinent to topics frequently covered by this blog. Three worth noting are about low-income savers, older workers, and small employers with retirement plans that are overdue for an upgrade. Here are brief descriptions: “A Fragile Balance: Emergency Savings and Liquid Resources for Low-Income Consumers:”: For low-wage workers in fast food, retail, and similar jobs, just finding enough money for living expenses is like squeezing blood from a turnip. Research shows that many want to save, and the absence of this backstop only increases their financial fragility. The default is often to resort to high-cost debt, which further confounds their ability to pay the bills, much less weather the next emergency such as a car repair. Finding…

New research finds that the people most likely to benefit from target date funds are also the people inclined to invest their 401(k)s in them – unsophisticated investors. Retirement and financial literacy researchers long ago established the pitfalls of our nation’s do-it-yourself system of retirement saving (i.e., people don’t save at all or don’t save enough, and investing is too complex for most people). Target date funds (TDFs) have become an increasingly popular solution to the investment piece of the problem in the wake of the Pension Protection Act of 2006, which allowed employers to use them as the default investment option in defined contribution savings plans. TDFs place a 401(k) participant’s accumulated savings into a broadly diversified portfolio of…