|Student debt has skyrocketed over the past decade, quadrupling from just $240 billion in 2003 to more than $1 trillion today.1If current borrowing patterns continue, student debt levels will reach $2 trillion in 2025.2
The rise of this “debt-for-diploma” system over the past decade was largely caused by the sharp decline in state funding for higher education, which has fallen by 25 percent since its peak in 2000.5
|However, despite the fact that student debt is now nearly a prerequisite for a college degree, we have not yet fully explored the impact of tying opportunity to debt.Though a college education remains the surest path to a middle-class life, evidence has begun to mount that student debt may be far more detrimental to financial futures than once thought, particularly for those with the highest levels of debt: students of color and students from low-income families.
This brief attempts to quantify just how much these soaring debt levels impact college-educated households’ financial stability over a lifetime.
It creates a model using data from the Federal Reserve Board’s Survey of Consumer Finances and other datasets to estimate household debt and assets, comparing the projected debts and assets of a college-educated household with average levels of education debt to a similar household without debt.
It finds that, over a lifetime of employment and saving, $53,000 in education debt leads to a wealth loss of nearly $208,000.
We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households, not even accounting for the heavy impact of defaults.
The model’s prediction of lifetime lost assets due to student debt also understates the impact of education debt on many borrowers in another way.
Student debt levels vary widely by both race and family income of graduates; thus, for low-income and minority borrowers, the lifetime cost of student loans will likely be even greater (see the box on the following for more detail).
Before we can account for the large differences in debt burdens by race and family income, we need to establish a baseline scenario to examine the lifetime impact of student debt on assets for an average borrower, which is the focus of the model in this brief.
Even when we consider this average borrower who (as explained below) saves and accumulates under somewhat ideal circumstances, the lifetime impact of student debt paints an already troubling picture.
|he indebted household examined in this brief’s model represents a “best-case” scenario for the wealth loss caused by student debt: as both earners are graduates of 4-year universities, the household is in fact an upper-income household, and its net worth approaching retirement is in the top 15 percent of all households, despite the wealth loss caused by its student debt. Households with higher levels of student debt— ones comprised of students from low-income families, students of color, or for-profit students—will suffer larger lifetime wealth losses due to both their higher debt levels and their other disadvantages. The impact of student debt on these disproportionately-impacted households will be examined in a forthcoming brief.Figure 1 shows the large impact that family income has on the debt levels of college graduates. Seventy-five percent of bachelor’s degree recipients from families with incomes of less than $60,000 graduated with some student loan debt in 2008, compared to just 48% of students whose families earned $100,000 or more. Students from poorer families were also much more likely to graduate with large amounts of debt: 14% of graduates from lower-income families had more than $30,500 in debt, compared to just 9% of students from families who earned $100,000 or more.
Average student debt also varies widely by the race of graduates, as shown in Figure 2.
For the class of 2008, 80 percent of African American graduates left school with debt, compared to 67 percent of Latinos, 65 percent of whites, and 54 percent of Asian Americans. African Americans also graduated with higher levels of debt, leaving with an average of more than $28,000 in student loan debt, nearly $4,000 more than the average graduate.
Figure 3 shows the average debt levels of indebted graduates by institution type. 2008 graduates of for-profit schools leave with particularly high debt; their $33,050 average is 64% higher than that of indebted public school graduates.
|o look at the lifetime impact of student debt on assets and net worth, we begin with two young households, nearly identical except that one has student debt and one does not. Each household is dual-headed and college educated, and begins its working life with the average salary, retirement savings, and liquid savings of an average younga dual-headed, college-educated household with and without education debt. Each household purchases a home at 31, the average age of a first-time homebuyer,6 and pays the average price, mortgage interest rate, and down payment of college- educated households with and without student debt, respectively. To determine these initial values, we used the 2010 Survey of Consumer Finances to compute average values for each of the above data points. We then use these initial values, as shown in Figure 4, as the base points of the model. And as the table shows, even early in these young households’ post college lives, the effect of student debt on assets is already becoming apparent.Young college-educated households without student loan debt have already begun to accumulate more retirement savings than similar households with student loan debt. More young debt-free households were also able to purchase homes (though this gap narrows when households in their 30s are considered). Debt-free households purchased more expensive homes, put down a larger down payment, and paid a lower mortgage interest rate than indebted households as well. Households with education debt, however, had higher average incomes than those without, which is consistent with other research on the incomes of young college-educated households.7 This income gap between indebted and debt-free young households is likely due to the influence exerted by the need to repay their debt on their job choices post-graduation, causing them to prioritize a job’s salary over all its other characteristics. However, such research also shows that the incomes education-indebted households quickly fall behind their peers without education debt, likely because the need for indebted households to make consistent monthly payments on their debt causes them to lack the job flexibility and mobility enjoyed by debt-free households. We incorporate this finding into our model as well.