How Wealth Transfers to Millennials Can Impact Student Loan Debt
There are lots of things to think about as baby boomers (the country's largest generation) ages. One: what happens to this generation's wealth when they pass on? Interestingly, according to some economists, millennials may be poised to inherit substantial assets through their boomer parents.
A little money can go a long way for many millennials, especially those with a great deal of student loan debt and other financial concerns. Could this wave of bequests help pay off loans?
A Coming Wave of Wealth for Millennials?
Baby boomers aren't going anywhere—yet. Boomers are the wealthiest generation in history and will remain that way until 2030. The question for millennials is what happens after that.
In population, millennials are a smaller generation than boomers. This means that, theoretically, boomers' wealth will consolidate as it's passed down to millennials through inheritance and bequest. This consolidation of wealth could be monumental; some estimates put the figure at $4 trillion of wealth that may be transferred to millennials across North America and the U.K. alone.
Wealth doesn’t "evaporate" from the economy—in other words, wealth merely changes hands. If this wealth transfers directly to millennials, then, this windfall could be a great thing for members of the generation who are deep in student loan debt or struggling to amass retirement savings.
But is the reality as good as the theory?
Not So Fast...
It's a little more complicated than getting rich quick. Many economists believe that the model of substantial wealth transfer doesn't take into account the majority of the population—instead, it's more realistic for a small percentage of top-tier global families.
That's because although wealth doesn’t disappear from the economy, it does get transferred often out of the hands of the holders. And if boomers' financials haven't been spotless, assets and wealth may move out of the family upon their passing. For instance, a house can foreclose and transfer to the bank if mortgage payments weren't kept up, or boomers can spend through any potential inheritance with high costs for end-of-life care, or by not preparing for retirement.
In this sense, consolidated wealth among the wealthiest will stay consolidated. Although you may end up with an inheritance, only a minority of baby boomers will pass on a significant, life-changing amount of wealth to millennials.
What This Means for Your Student Loan Debt
Unless you know you have a massive bequest coming, it pays to pay off your loans. The average interest rate for student loans is currently between 5% and 7.5%. If you wait for an inheritance, any bequest you may receive may end up paying off only your interest instead of the principle. For instance, if your inheritance comes in 2030, and you have $50,000 of loans, you could end up paying upward of another $30,000 of interest if you're not paying anything for the next decade.
Another unfortunate fact? Realistically, those receiving life-changing bequests are the least likely to be in student loan debt in the first place.
Of course, you can't be totally sure what's coming—or what's not—unless you get intimate with the financial details of your family. The best thing that you can do is to understand the financial situation of anyone from whom you think you might be due an inheritance. This may mean talking to your family directly. If that's not an easy or possible conversation, you can, alternatively, seek out a financial advisor (or talk to your family's if they have one), or an estate planner who helps to put the affairs of your family in order.
At the end of the day, you need to know the assets and debts in your family so you can understand what to expect down the line. And don't delay paying off high-interest loans, even if you're just chipping away a small amount at a time.