As someone who is both a millennial with bills to pay and also a journalist in a college town, I am acutely aware of our student debt crisis.
That’s why any plan to actually do something about it immediately catches my eye.
However, Sen. Rand Paul’s plan announced earlier this week can be tossed right in the trash.
Paul introduced the Higher Education Loan Payment and Enhanced Retirement Act, also known as the HELPER Act, Dec. 2 because that Kentucky Republican is a helper, y’all.
His plan would allow Americans to annually take up to $5,250 from a 401(k) or IRA to pay for college or pay back student loans. The funds would be tax and penalty free and could also be used to pay tuition and expenses for a spouse or dependent.
On its surface, this is a terrible plan. Go talk to anyone in personal finance and ask them what they think about using money for retirement to pay down student loans. Please, go ahead. I’ll wait.
If you did not actually go anywhere, I will tell you what they said. They said absolutely not. The number one piece of advice I received in my multiple personal finance classes I took in high school and college was pay yourself first. Put money in savings or retirement before you pay your other bills. You will eventually reach a point where you cannot go to work.
It’s incredibly financially irresponsible to use money saved for when you can no longer work for anything but that, particularly when pensions are largely a thing of the past and Social Security is predicted to run out by 2035.
If you do not, you will be forced to work longer and limit opportunities for the generations behind you, which leads to more debt and a stunted economy because younger people aren’t working to their full potential and are not able to buy things.
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Our economy depends on younger people being able to buy things. Elderly people need to sell their biggest investment — their house — and there aren’t a ton of other elderly people in the market for a mortgage.
It’s already a problem. According to Northwestern Mutual’s 2019 Planning and Progress Study, Americans aren’t saving anywhere near enough for retirement. Fifteen percent of people in the U.S. have no retirement savings at all and 17% have between $1 and $74,999, which experts say isn’t near enough.
Paul argued in an op-ed earlier this week that using $5,250 for student loan repayment instead of a low-yielding bond is “more advantageous to workers, as 95% of the student loan payment goes to principal.”
The problem with that is that when you are young, you really should be investing in the high-risk, high-reward stocks that have an average return of 10%. Also, taking your money out of the 401(k) means you miss out on the critical compounding effect. Your money will grow exponentially in a 401(k) because everything you make in interest is reinvested. That’s not going to happen if you use it for a loan payment.
Plus the amount of your payment that goes to principal varies wildly based on the loan, the interest rate and the amount you’re paying. It’s not necessarily 95%.
Like many Republican plans, the HELPER Act really is only helping if you’ve already got a decent amount of money to start off with.
You, very naturally, make very little money when you first get out of college. You make even less before you go to college. You don’t yet have the experience or knowledge base to demand a high salary, so even if you contribute the maximum match, chances are really good you’re not putting anywhere near enough in there to take out $5,000.
If you’re not earning enough to make your student loan payments, you’re probably not going to earn enough to have enough money to put aside a significant amount in your retirement account.
Altogether, this is barely a drop in the bucket of the problem as a whole and he’s laying it out like it’s going to solve things.
On the plus side, at least he is actually admitting student debt is a crisis the government can help solve, rather than just insisting the problem is that individuals aren’t pulling hard enough on their bootstraps.
Jourdan Vian can be reached at email@example.com or follow her on Twitter at @Jourdan_LCT.