How Student Loans Will Affect Your Finances for the Rest of Your Life
December 23, 2013

A new study by non-partisan public policy organization Demos reveals that student loans don’t just affect you while you’re paying them off. According to their data, borrowing for school is likely to reduce your wealth over the whole rest of your life. With more and more students borrowing each year to finance their college educations – and borrowing more dollar-wise than ever – this is unsettling (and yet not entirely surprising) information.

How Demos Calculated the Projections

The organization relied primarily on government data obtained from the Federal Reserve Board’s Survey on Consumer Finances on debt and assets in households where the adults were college educated (compared to those without college degrees) and those that had to borrow to pay for college and those that did not. Their conclusion was simply this: a household with $53,000 in student loans (assuming two adults each with student loans averaging $26,500) would see a wealth loss of more than $205,000.

And Demos then extrapolated their data to estimate that the current $1 trillion national student debt load will keep $4 trillion out of our economy over the life of these loans. But that’s not all – the number crunching revealed that for minority borrowers and those that have student loans but end up generating low income, the impact is far greater than the four-fold impact for average-earning borrowers.

How the Wealth Loss Breaks Down and Other Findings

The bulk of the average $205,000 loss in wealth breaks down in two ways – $70,000 of the decrease is in lower home equity and the other $134,000 is reflected in decreased retirement savings. What’s most troubling is that even though college degrees and higher education promise to make life better and secure grads with a middle-class lifestyle, in fact, it can hold many back from just that.

College students coming out of families that earn $60,000 or less are more likely to borrow more as are students from minority families. African American students borrow roughly $4,000 more than most other students and students from poorer families borrow more than $6,500 more than average borrowers. And students at for-profit colleges are hardest hit, no matter their background and borrow almost $10,000 more.

Student loans affect savings and home equity

At What Cost – Demos student loan debt study results
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How Student Loans Impact Home Equity and Retirement Savings

Most grads in the data set purchased their homes at age 30 (with a partner in a two-debt, two-income couple scenario) but those with loans bought less expensive homes and were able to put less money down, which downgrades equity from the get-go. Putting more money down results in lower interest rates and lower monthly payments which then creates more disposable income to set aside for retirement and avoid other debt.

Click to read the entire report: At What Cost? How Student Debt Reduces Lifetime Wealth. 

The Bright Side of the Demos Student Loan Study

The study does show that college educated households fare better than those without college debt and Demos’ research showed other good news: those with college debt tend to seek out (and find) higher paying jobs simply because of the necessity of having the necessary funds to service their student loans. The flip side of this is that those in debt don’t have the flexibility to pursue career changes and must prioritize salary above all other characteristics when choosing a job opportunity.

Bottom Line

Student loans continue to be a growing concern for not only those in debt, but for our society as a whole because of the money monthly payments take out of the economy. Hopefully studies like these will intensify the pressure on legislators to offer some meaningful solutions for those too deeply in debt.

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