Wednesday, August 3, 2016

Lengthen Student Loan Payback Time To Increase Millennials' Retirement Savings And Home Purchases

My posted comment to The Wall Street Journal article, "Most Millennials Don’t See Becoming Millionaires, Study Finds: Tough job market and high student debt has many doubtful they will bank a million dollars for retirement" by Veronica Dagher:
The current maximum Roth IRA contribution is $5500 per year or about $105 per week. A 25 year old putting $105 per week into a diversified mutual fund or ETF, such as an S&P 500 index, for 40 years until retirement at 65, with an average total return over the 40 years of 6 percent, will have over $900,000, tax free, in the Roth IRA. If the 40 year average return is 8 percent, the total will be $1.6 million. A 10 year delay in saving will reduce the $900,000 accumulated savings to $460,000 and the $1.6 million to $680,000. The earlier one starts saving, due to compounding, the more one has at retirement.

The biggest problem with student loan debt is not the amount, or the interest rate. It is the ridiculously short payback period of 10 years. Education is a life long investment. Increasing the payback period to 20 years, decreases monthly payments by almost 40 percent. A longer payback time for student loans will increase funds for home purchases and retirement savings.

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