Could IRS Ruling Quicken Pace Of Homeownership For Student Loan Holders?

JCHS tabulations of Federal Reserve Board, Survey of Consumer Finances.

In Texas, the average debt is $26,292 and 56 percent of residents hold student loan debt. But one company found a way to make it go away faster.

In 1995, about a quarter of adults aged 20-29 had student loan debt. In 2016, it had increased to 47 percent. The percentage who had less than $10,000 went from 16 to 12 percent, while those owing $10,000 to $24,999 rose from 8 percent to 15 percent. Former students owing $25,000 to $49,999 also jumped from two percent to 12 percent and those owing over $50,000 from one percent to eight.

We also know that it takes the average college-educated person with student loan debt until around age 35 to reach the homeownership rates of their peers without debt. Student loan debt is one of the biggest reasons the Millennial generation took so long to purchase a home. And what about Generation Z, whose oldest have just drank their first legal beer while waiting for their even larger student loans to come due?

To help their debtor employees, Illinois-based Abbott Labs asked the IRS to allow the company to contribute to an employee’s 401(k) retirement plan even when the employee didn’t, so long as the employee was paying off student loan debt. For example, were the employee to apply at least 2 percent of their salary to their student loans, the company would contribute five percent into their 401(k) retirement plan – the same match as if the employee had contributed that two percent to their 401(k).

The IRS granted the request in August and now others are trying to get the IRS to issue a more general ruling.  It’s the first time the IRS has allowed an employer to contribute to a 401(k) without an employee contribution. It also marks government and business realizing the crippling effects of student loans. By age 30, those without debt have accumulated 50 percent more in retirement assets than those who had student loans. Since retirement savings is a long game, starting out in such a deep hole is near impossible to make up.

1949 tract house. Bought for $42,000 now selling for $600,000

Part of retirement assets include real estate, epseicifcally a primary home. The earlier one gets on the property ladder, the more that time and appreciation grow. The home my parents paid roughly $42,000 for in 1972 skirts $600,000 today (over double the rate of inflation).

Under the Abbott option, employees would be able to dedicate more resources to paying down student loans quicker while not completely sacrificing 401(k) contributions. I imagine many try to contribute to both, which weakens their ability to pay off the loans. The sooner a student loan is off their backs, the quicker they will purchase a first home.

The National Association of Realtors should add their voice to the groundswell of corporate support for this type of program. Many corporate retirement plans are governed by the Employee Retirement Income Security Act (ERISA). Their industry committee has already sent a letter to the IRS seeking a more generic guidance on the Abbott case that would allow others to take advantage of the new option.

The Mess of Student Loans

Why has the cost of an education skyrocketed in recent decades?  Greed. In 1978, the Carter administration signed bankruptcy reform bill that protected federal student loans from being extinguished in bankruptcy. The bill was in response to bogus claims that high numbers students were graduating and claiming bankruptcy to avoid repayment. It was especially bogus because in 1979, needs-based Pell Grants covered 77 percent of the tuition of a state school and 36 percent of private colleges. The current grant of $5,775 hasn’t kept pace with tuition increases and now equates to 57 percent and 16 percent of tuition costs respectively.

The average annual tuition and fees for a state school was $800 in 1980 ($2,591 in today’s money) and $3,620 for private institutions ($11,725 today). In 2018, the average state schools is $9,970 (385 percent increase) and $34,740 for private colleges (297 percent increase). Both are waaaaay above the cumulative inflation rate.

Then in 2005, the Bush administration extended the non-extinguishment of student loan debt from federal-only debt to private lenders.

It’s the inability to extinguish debt in bankruptcy that led to a tidal wave of money into the student loan marketplace. Imagine the lax lending that occurs when there’s little oversight into whether a student would ever be able to pay off the loan? Imagine the monies thrown at marginal students who don’t complete schooling? Imagine the rise of the for-profit education industry waiting to pick the pockets of the unwary.

Actually, you don’t have to. Remember the sub-prime mortgage fiasco of the housing bubble-turned-Recession? Now remember it without bankruptcy to clear out the bad loans. Those victims would be forever impoverished, impacting the economy for decades.

Barring the extinguishment of student loan debt in bankruptcy wasn’t needed at the time. However, now that so many bad loans have been made precisely because borrowers can’t escape, it’s needed now.

Back to Abbott

Anything that can be done to extinguish student loan debt faster that enables younger people to start building the assets they will need in retirement (including real estate), should be welcomed. I’m probably as stunned as you that this originated in Big Pharma, but then again, they’re in a high-margin business.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email sharewithjon@candysdirt.com. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.

 

 

 

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