EduBubble

For grins I decided to chain together some stats after hearing that 22% of Fidelity’s 401k customers have taken out loans to pay for medical bills and college. The size of these loans are surprisingly big:

Here’s my math:

• The size of the 401k retirement stash is $2.7 trillion.
• Fidelity holds 401k plans for 11 million people.
• 22% of Fidelity 401k customers have taken out loans averaging $8600 and the average size of their account is $61,800. That’s about 14%.
• Paying tuition is one of the common reasons for taking out a loan against your 401k.
• For comparison, student loan debt is $829 billion.

Assuming Fidelity customers are representative and all customers are equal, that’s $3700b times 22% times 14%=$114 billion in loans against 401k plans. If we conservatively guess that only 50% are using the money for college tuition, that suggests that $62 billion was borrowed from retirement funds to pay for Johnny’s tuition.

The 401k market, though, is just part of the entire retirement system because many people don’t have 401k plans. The Calpers pension plan covers state workers in California and has about $250 billion alone in assets. These are just the government workers because there’s a separate pension fund for the teachers  and that’s about half the size.

If we assume that the 401k stash is about 10% of the total pension funds and everyone has borrowed cash at more or less the same rate as Fidelity customers, we can guess that parents have borrowed $620 billion to fund college tuition– something that’s pretty close to the official total of student debt. This suggests that the shadow debt is a real factor.

This is a house of cards built on easy assumptions. I don’t expect that it’s accurate but I do believe it’s in the ballpark.  Many so-called financial aid plans routinely suggest that the parent contribution should be about double or triple the size of the loans taken out by the kid. The University of Pennsylvania, that super-generous place offering “NO LOANS”, the kids borrow nothing but the parents take out huge PLUS loans.

This makes the problem even larger for society. Once the kids manage to pay off their huge debts, their parents will start to think about retiring. Let’s hope the parents are able to repay their debt to their retirement plan because if they don’t, they’ll be borrowing more from Junior.

Sheesh. These numbers are scary.