NerdWallet's Smart Money Podcast - New Student Debt, and a Couple's Money Baggage

Episode Date: May 16, 2022

Student debt cancellation may be on the horizon. But a new generation of graduates is set to take on another load of burdensome debt. To start off this episode, Sean and Liz talk with NerdWallet data writer Liz Renter about her new report on the debt high school graduates may face — and how they can mitigate it. Then Sean and Liz answer a listener’s question about how to get past the money baggage in their relationship and manifest an exceptional financial future together. To send the Nerds your money questions, email a voice memo to [e-mail]. You can also leave a voicemail or text us on Nerd hotline at 901-730-6373. Timestamps: This Week in Your Money segment: 0:00 - 8:20  Money Question segment: 8:21 - 28:08  Like what you hear? Please leave us a review and tell a friend.

Say you and your partner come from really different money backgrounds. I mean, really different. One of you grew up with a trust fund and the other is deep in debt. How do you reconcile your differences and build a life together? Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Piles. And I'm Liz Weston. Let the nerds answer your money questions. You can call or text us at 901-730-6373.

That's 901-730-NERD. Or email us at podcast at nerdwallet.com. Follow us wherever you're getting your podcasts to get new episodes delivered to your devices every Monday. And if you like what you hear, please leave us a review and tell your friends. Before we get into this episode, we have a call out for all the parents who listen to Smart Money. We are working on a new series about the cost of child care. And we want to know, how are you paying for it?

Where does it fit in your budget? And have you had to make other sacrifices to afford child care? Leave a voicemail on the Nerd Hotline at 901-730-6373 or email a voice memo to podcast at nerdwallet.com and tell us how you're making child care work for you and your family. In this episode, we answer a listener's question about how to make the life you want with your partner when you come from very different financial backgrounds. But first, in our This Week in Your Money segment, Liz and I are talking with another Liz, NerdWallet data writer Liz Renter, about her new column, which digs into the next

generation of student loan debt. Welcome back to Smart Money, Liz. Thanks, Sean. Hey, Liz. Happy to be here again. In your latest column, you dig into how much student loan debt 2022 high school graduates might take on. What did you find? Yeah, I found new high school grads heading into college could borrow as much as $39,500 to get their bachelor's degree. And yeah, right. And this is a conservative estimate. I looked only at public four-year institutions, which as you know, are some of the most affordable. And I didn't assume that they were borrowing the entire cost of their education. So I looked at what students now are borrowing

and then projected that into the future. So this is a pretty conservative estimate. How does that compare with past years? Well, you might actually be surprised to find out that this estimate has only changed slightly. And the reason for that is that the growth in the cost of college has actually slowed. So college is still way too expensive. The cost of attendance and room and board at a public four-year institution hit $22,700 in the last academic year. But growth over the past 10 years has just been 12%. And I say just been.

That's because the decade prior, it was 22%. So it has slowed down. And that's why this estimate about how much college freshmen might be borrowing the next several years has not really changed a whole lot. But it's still an alarming amount of money. Yeah, it seems like this is a story that we hear year after year, students are expected to take on a massive amount of debt. And it doesn't seem to be getting any better, but at least it's getting worse at a slower pace than in years past. Yeah, that's a good way of saying it.

You also found that the burden of student loan debt is shifting more to parents and guardians. What's going on there? More parents are borrowing on behalf of their children and they're borrowing more. So the amount that they're taking out is actually growing as well. So could that actually hide the amount that is being taken out in total for a new graduate to get a degree? Because yes, new grads are taking on a good amount of debt, but their parents are taking on even more than in years past. So perhaps the total is larger than we're looking at? That's a great question, Sean. So in my analysis, that $39,500 is the total amount borrowed. So that could be shared

across students, parents, or even private student loans. But as I said, that's a conservative estimate. Some students may need to borrow more, in which case their parents may be taking on more as well. And as a parent, this concerns me because I fear a lot of parents are taking on debt that they really can't afford. They should be saving for other things like retirement. Yeah, you're absolutely right, Liz. We actually did a survey last year of parents with Parent PLUS loans, and we found that more than one fourth of them say it's affected their retirement plans. And another 21% regret taking out the loans entirely. As a parent too, I wonder if some of this is that parents are less likely to have a robust college fund for their kids. And there's a little sense of

responsibility there. Like, well, I can't pay out of pocket to send my kid to school, but boy, I'm going to do what I can. And then cuts into their goals. Right. Well, a lot of parents who take out loans for their kids are past their peak earning years in some instances. So that can make it harder to pay off this debt. Right. You're exactly right. And you know, the idea when your child goes to college is that when they graduate, their earning power will be higher. Unfortunately, when you take out a loan to send your child to college, the same can't be said about your earning power when they graduate, right? It's less likely to climb in that same way. Private loans are also growing in prevalence. Can you talk about why this is and what that could mean for borrowers?

There could be a couple reasons why private loans are growing. So we found that the students relying on private loans has grown from 1% to 9% in the most recent 20-year period. Now, it could be that parents can't borrow. So, you do have to not have an adverse credit history to take out a Parent PLUS loan. Or it could be that some parents are deciding, you know what, we're not going to shoulder these costs. We're not going to jeopardize our retirement. And that would also funnel some students into private loans. The problem with private student loans is they lack some of the same protections of federal student loans. Also, they come at a higher interest rate. And there aren't options like income-driven repayment plans.

Another good example is in this most recent student loan payment pause that came as a result of the pandemic, private loans weren't included in that. We know that college debt can be debilitating for a lot of borrowers, students, and parents alike. So Liz, what can people do to manage college costs? Yeah, I feel like we kind of harp on this first one that I have to say, but it's because it's so important. And that is fill out the FAFSA, the Free Application for Federal Student Aid. It's paperwork. Nobody likes to do paperwork. But the thing is, in addition to determining how much federal student aid money It's paperwork. Nobody likes to do paperwork. But the thing is, in addition to

determining how much federal student aid money you qualify for, it can tell you how much state and institution aid you qualify for, including scholarships. Scholarships are a limited pool of money. So the quicker you get that application in for them, the more likely you're going to be given a chance at some of that money. Yeah. And grants and scholarships are free money, which is always better than money you have to pay back. Yeah, you're absolutely right. They're interest free, you're not borrowing. Another tip that I would say is borrow only what you need to borrow. Your school is going to tell you what you qualify for, but you don't have to accept the entire package. So get strategic about how much you're going to actually use. And if you

end up borrowing more than you actually needed, you have 120 days to return a portion of the federal student loan money without any penalties. Another tip that you point out in your article that I thought was pretty insightful was to stick it out when the going gets tough. Because the most recent graduation rate among first-time undergraduates was 63%, according to the Department of Education. And that means that almost 40% of undergraduate students are leaving without a degree, but with all the debt they took on to go to school in the first place. And that can make it really hard for them to earn enough to pay off this debt. Right, Sean. I think we can justify student loan debt when we know that we're going to

graduate with greater earning power. It's going to be easier to pay that loan debt down. Unfortunately, if you leave beforehand, you're not going to get the benefit of that increased earning power. Now, a college degree might not be right for everyone. Their trade schools are perfectly acceptable ways to pay your bills. But keep that in mind if you've already put in time at college that leaving could put you in a disadvantage when it comes time to pay it off. That's great advice. Well, Liz, thank you for talking with us. Now let's get on to this episode's money question segment.

This episode's money question comes from Nicholas, who left us a voicemail. Here it is. Hi there, nerds. My name is Nicholas, and my husband and I have kind of a multifaceted money situation. We come from incredibly different financial backgrounds and view money quite differently. My family was able to put me through college debt-free while he has a large sum of student loans. I was able to buy our house without a mortgage with money from a trust fund while he's working with a debt consolidation company to settle his credit card debt.

And my dad gifted each of his children a car when we needed it, and his car was repossessed. So all of this is to say that we're now in a pretty good place financially in our marriage, but I worry about our future with money. Someday we want to be debt-free, have kids. How do we talk openly about finances and reconcile our different financial histories and come together to manifest an exceptional financial future together? Thanks so much. We love what you do. Bye-bye. To help us answer Nicholas's question on this episode of the podcast, we are joined by occasional Smart Money co-host, Sarah Rathner. Welcome back to the podcast, Sarah. Thank you for having me back. Always a pleasure. So this is one of my favorite topics is how to actually talk about money. And it's not always easy to do so. Sarah, how do you think couples should begin this conversation?

As respectfully as possible, always. That is number one, because you might have some pretty intense disagreements with your partner over the course of your life together about money. But always remember that you love each other. And you don't have to be the exact same person when it comes to how you manage everything about your life. But you do need to find ways to manage your life together. And you're not going to do that if you guilt or shame or some other negative behavior, the person that you love, you're going to have a stronger partnership if you each approach it with a real sense of understanding for the other person. Yeah, I think having alignment on shared goals can also help as well, because that makes

every conversation about money, an effort to get to where you want to go. And it's less about how much money you may have in your bank account, or in this case, like your trust fund or your credit card balance, and more about how can we work together to make the life that we want? Exactly. I like the tone of the question, because it's obvious that Nicholas really loves their partner and understands that Nicholas got some advantages that the partner didn't get. And that can make a big difference in terms of how much debt you wind up accumulating, the mistakes you make and their consequences.

One thing I was thinking is that even the fact that Nicholas sent us this question kind of implies that they might be further along in talking openly about their finances than they might understand or appreciate right now. Yeah, this doesn't come out of nowhere. This is probably something that they've been talking about, possibly even since the early days of their relationship. So before marriage, before really forming that committed partnership together, where you begin to share your expenses, you begin to tell each other a little bit more about your backgrounds and your history of handling money, your history of solving problems that are financial in nature. It's really like a lifelong conversation. Unfortunately, you can't just have one conversation about money and be like, okay, we've solved all the problems. Time to move

on to something else. It doesn't work like that. I realized that I might be a little biased about this, but I feel like every time I spend money with my partner, that ends up being an opportunity to have a conversation about where we are with our finances in that moment. So we can continue to figure out, okay, am I on track for saving for the vacation that we have coming up? Or how is this big bunch of money I'm trying to save for my home improvement project coming? Every meal that you have out is maybe less that you have to save. So that can become a different conversation about goals. Sarah, could you talk a bit about how to start these conversations? Because I think a lot of people shy away from them. They're so worried that things will go off the rails. They don't even want to start. Oh, well, what I highly recommend

is don't marry somebody if you've never had these conversations. That's number one. You don't want to... Assuming that boat has sailed. Yeah, let's assume that boat has sailed. So regardless of the length of your relationship and the level of seriousness, you do want to start talking about money kind of early and often. It's like voting. It could be something as small as just...

When you're first getting to know somebody, you kind of ask them a little bit about their friends, their hobbies, their family background. You get a little sense of where they came from and how they view money and how they spend their time and how their friends spend their time and how you spend money can be very heavily influenced by who you hang out with. And as you get to know each other better and you begin to maybe take your first vacation together, you move in together, you talk about getting married. Those are all these joint financial decisions you start to maybe take your first vacation together, you move in together, you talk about getting married, those are all these joint financial decisions you start to make.

And that's where you begin budgeting together. Maybe you're planning that first vacation, and one of you is used to luxury travel, and the other one is used to staying in youth hostels and buying every meal in the grocery store. And so you have to begin compromising, well, what do trips between the two of us look like? Because they're not going to look like the way our individual trips have looked. And so it's this constant push pull. Yeah. I mean, I do think that there comes a time in every relationship where you need to sit down together and really lay things out. It can be hard to do in the beginning, but it often is a result of just necessary life circumstances. I'm thinking back to when Garrett, my partner and I initially had conversations like this,

and we were living in San Francisco. And the fact that the cost of living was so expensive in that city meant that we had to be talking about money pretty regularly. But I still found it very difficult to do because I knew that he was always a saver. I always had a hard time saving. And so what helped me is that I would always put on the same Erykah Badu CD because it put me in this really comfortable mindset where I felt like it wasn't this tense conversation where we are having an official money meeting. We're just hanging out and talking. And so that helped break down some of the barriers that made me anxious when it came to talking about money. Yeah. For me, with my husband, it was about going like really long walks,

or like if we're on a road trip, there's something about being side by side, but not facing each other that kind of lets you talk into the ether a little bit. Yes. And you're a captive audience. You're not distracted by work or the TV or your phone. You're just moving forward together, either on foot or by car. And you just kind of start talking about these things. And I would say that a lot of our sort of really initial serious conversations that brought us closer together over time have occurred in these circumstances. It wasn't like these meetings that we had at home, it was more like we're out

walking to brunch, and it's a 30 minute walk. And we spend that 30 minutes talking about something we want to do or something we need to pay for. And Sean, what you were saying about you and Garrett not being on the same page, I think that's more the norm than anything else. In fact, sometimes you're not even in the same book. You're so different with how you handle money. But over time, you can start understanding what your partner needs and have those conversations to get you closer to some kind of consensus. But there's still going to be times when your partner wants something more than you do. And my husband basically says, whoever wants it most gets it. So sometimes he's going to

agitate for something and I'm going to go, okay, it's not that important to me. I'm going to let it go. Yeah. Well, I think there's also a benefit to having your money separate when it comes to couples. At least that's how Garrett and I manage it because I have never met a dollar that I didn't want to spend or put to some purpose, whether it's putting it into my retirement account or putting it toward a new pair of shoes or something. And Garrett is not a shopper at all. He bought clothes last month for the first time in almost two years. And he's like, well, it's about time I get something new, which I am a little envious of. But it shows that you can have different views on money, but still be in the same boat and be

working toward the same goals. Like we know we want to have a certain type of wedding when we do eventually get married. And that's fine. We're working toward that. But in the meantime, if I'm going to take a vacation with my friends, that's fine. I can afford to do so. And maybe he's going to do something else on his own. And that's totally okay as well. This might take us on a totally wrong track, but you kind of stepped into a very controversial area, which is having any money separate. And we've always had slush funds. We keep most of our accounts joint, and then we each have our own money to spend with no questions asked. But Helene Olin at the Washington Post just did a column about some research showing that people who merge everything actually tend to have longer relationships. It's like, ah!

Interesting. Is that because you are literally financially dependent upon someone in some ways? I have no idea. It's like correlation rather than causation. We can't really know what's causing that, but it was some fairly interesting research. So it might be worth taking a look at. You've been with your husband for over 20 years. 25, yes. Yeah, it might be a good counter argument. Exactly. I don't know. But every couple is going to be different. Some people want to merge their finances the moment that they can. And some for some couples, that's a necessity, because only one person is earning money. That's okay, too. But again, it's about having shared goals, having a regular dialogue, knowing where your money is going, and making sure that you are financially stable. Yeah, yeah. And having the

ability to pivot if you've agreed upon one way of managing your money, and neither of you are happy about it, or one of you is not happy about it. And then you can sit down and talk and renegotiate and say, you know, this actually, I thought this was a good idea and I'm miserable. Can we do something different? You know? Yes. Yes. And giving each other the space to say, I don't think this is working the way we thought it would. Yeah. One thing that stood out to me in Nicholas's question is that they are interested in reconciling their different financial histories, which I found really interesting because everyone's going to have their own unique backgrounds. How do you think a couple can reconcile their different backgrounds like this? Speaking openly and honestly about it with each other, just about a general rundown of what your background was like,

what money looks like for you growing up, how your parents or other relatives managed it, maybe some mistakes you noticed them make, some mistakes you felt that you made, and just getting that all out there. So, nothing's really a secret anymore because you can't reconcile anything you don't know about. That's step one. I mean, honestly, step two, I'm a huge fan of getting professional help. You can talk to a therapist, even a financial therapist, some sort of financial coach. I mean, honestly, I would say to Nicholas, if you're somebody that has a trust fund that allows you to buy a house in cash, you probably should have a financial planner. I'd say so.

Fee only fiduciary. Yes, please. And I would also say to anybody who maybe came into a marriage or a relationship with substantial assets, you might have had your own financial advisor that you worked with when you were single. Bring your spouse or partner into that relationship with the financial planner so you can talk about things as a couple with them. Because you now have these shared goals, you have your own background about money and their background about money. And a third party can be very helpful in taking that 10,000 foot view of your situation. So I would invest in that.

The reality is there are some pretty significant measures that people should be taking when they combine finances if one of them is much wealthier than the other. And one is simply understanding how separate property works, how community property works if you're in a community property state. Because again, there can be some hard feelings caused if somebody says, well, this is my money, I'm keeping it separate. The other partner might go, what the heck? But there could be some really good estate planning reasons for doing that. This is all stuff that needs to get talked about because the misunderstandings can go both ways. It's not about keeping your money away from your partner. Maybe you and your partner have established a certain standard of living, thanks in part to your good luck, basically. And if something were to happen to you, you might want your partner to continue living up to that standard. That's another part of estate

planning is ensuring that the person that you love can continue to live at a certain level if you can't support them anymore. And I don't know if this is the case for Nicholas at all, that this was not included in their voicemail, but for anybody that maybe comes from generational wealth, the way the money is managed professionally might be something that like your parents or even grandparents picked, they might have picked a financial advisor, investment manager or something. And you just kind of go along with it, because you've inherited this money. Those people might not be a good fit for you and your partner, just because they've been managing your family money for several decades. If your partner kind of steps in and they see things from a different angle and they say, I don't like this person that is managing the money. I don't think they take

you seriously. I think they're kind of old school about things. They tell your parents stuff that we talk about, you know, something. Big red flag. Yeah. It's kind of like going to your mom's gynecologist. Eventually, you just need to cut the cord. I don't know. Find your own. Well, the people with wealth a couple of generations ago wouldn't necessarily have chosen a fiduciary,

which means that the person puts your interests ahead of their own. So there's a really good reason to take a look at it, make sure that the advice you're getting is fiduciary, and that it's a fee-only relationship, that they're not profiting from whatever investments they're recommending to you. Yeah, money management's changed so much because there's so much technology that has democratized money management. You could just do everything from your phone now, which is not to say you don't necessarily need to talk to a professional, but it is to say you want to work with somebody who can help you understand the way to manage money now and into the future in a way that might not have been an option for previous generations.

Well, speaking of the future, Nicholas and their partner are looking to take their money backgrounds and figure out a way where they can come together and manifest their exceptional financial future together. How do you guys think they should begin to do so? I love this goal. I want everybody to manifest an exceptional financial future. I love this. A big part of this is that big, big goals are very nebulous. And it's really easy to say, I want to be a millionaire or I want to buy a house. But for whatever goal comes next, you start with the big overarching goal, but then break it down into actions, smaller, manageable tasks that can propel you forward inch by inch until you've accomplished that goal. Because it's one thing to say, I want to pay down all of my debt. But it's another thing to say, I'm going to put an extra $200 a month into my debt payment and apply that toward the principal.

So I can pay my debt off X months or years faster and save this much money on interest. Once you put real numbers on it, you can begin to say, okay, well, how can I free up $200 a month from my budget? Maybe I stopped spending money in this area, or I cancel all these subscriptions, or I dine out less or something. Then you could begin to think of concrete ways to reach your goal. Yeah, that makes sense. And because they are interested in starting a family, it seems like one great place to look into more would be to really understand all the steps it would take as a same sex couple to adopt a kid to have a family like that is very complicated and potentially expensive. Yes, adoption is about five figures. Surrogacy can be six figures.

Wow. And for any couples who are facing infertility, infertility treatments are also incredibly expensive as well. And a lot of times they're not covered by insurance, unfortunately. So the avenues to become a parent, it's not that easy for everyone. Yeah. But once you start digging in, then you see the steps that you need to take to really get to where you want to go. Yeah. People don't just hand you a baby. It doesn't work that way.

Which is probably a good thing, I'll say. Probably a good thing. They should ask at least three questions before they hand you the baby. Like question one, you know this needs food, right? So that's definitely something to think about. And then also, once you have the child, you have to raise and educate the child. And that's another long series of expenses to save for. So you might want to think about saving for education.

And the good news is we know that Nicholas's parents are pretty generous and 529s give wealthier parents or grandparents a chance to front load contributions. You can take an amount of money that's called the annual exemption, which this year I think is $16,000, and you can put five years worth of those annual exemptions into a 529 without messing with your estate plan. It basically gets the money out of your estate so it can grow tax-free and fund the education. It's kind of a weird little twist that to my knowledge, only 529s offer this ability to front load those annual exemptions. But

for wealthy grandparents, it can be a really great way to help the grandkids and reduce their own estate. And 529s are not just for university, but also can be used for K-12 education, like private schools, right? Yes, exactly. If you're thinking about the child's education well before college, and you think that private school might be something that you want to consider, then that's another great use of that money as well. All right. Do you guys have any final thoughts around how Nicholas and their partner can begin to

make their exceptional financial future together. I think they've already started. It sounds like they've had some really great meaningful conversations about where they come from and where they want to go together. And that's really the important thing. And you just got to remember that this is the person that you care about. This is the person that you're making a life with. And you want to walk down the same path. Yeah. And so... Keep the conversation going. So put on Erykah Badu and keep setting goals for each other. You know, everything you want to do in life, it has a money component to it. So, so set those goals and then just sit down and talk about how

can we pay for this thing that we want to do? Yeah. Well, Sarah, thank you so much for talking with us. Thank you. With that, let's get on to our takeaway tips. I'll start us off. First up, maintain a dialogue. Having an ongoing conversation about your finances can help you establish shared goals and understanding. Next, know how to accomplish your goals. Break larger goals like paying off debt into smaller, more manageable steps. Finally, focus on the long term. Manifesting your dream life as a couple can take years to accomplish. Take steps each day to get there.

And that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. Here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team.

Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.