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A new study released by public policy organization Demos illustrates that college graduates who amass student loan debt during their studies will likely pay a much bigger price throughout their lives than their debt-free cohort.
Worse lifetime wealth prospects
The study shows that graduates with college debt in fact have significantly worse lifetime wealth prospects as a result of the draining effects of repaying loans over decades. This goes beyond penny-pinching and struggling to repay loans during the course of repayment terms. The effects are more longstanding and far-reaching than this, lasting well beyond the time the final student loan dollar is repaid.
A necessary burden with major financial implications
Despite a college education being necessary for some of the higher wage-brackets and high-flying careers, the detrimental aftereffects of student loan debt are much greater than previous thought, according to the Demos study. This is particularly the case with students from disadvantaged backgrounds and lower socio-economic demographics, for whom debts will not be repaid with family assistance and will take longer to be paid down without help.
How student debt impacts wealth prospects
The Demos analysis looked at a wide variety of data and formulated a very accurate model through which to compare debt-laden and debt-free households.
Here are 5 of the harsh realities of student debt for graduates’ wealth potential:
1. A household comprised of two adults with college education and average student loan debt will lose a total of $280,000 in potential wealth throughout their combined lifetimes.
The study shows that 66% of college graduates with four-year degrees have an average of $26,600 in student loans. When this number is magnified by two, to represent the two indebted heads of the household, this means that the family will be paying off $53,000 in student loans.
Consequences: Having such large debts between both wage earners in a household creates difficulties with spending and saving, as any non-allocated income needs to be put towards paying down student loans faster.
2. Over the past 10 years, the total amount of student debt burdening American college graduates has multiplied by 4, now totaling $1 trillion dollars.
This massive amount of debt impacts lost wealth possibilities to the tune of $4 million for households with average educational debt.
Consequences: Student loan debt has quadrupled in 10 years, meaning that Americans exponentially stand to lose out more and more in the future, with further limited opportunities for amounting wealth presenting themselves once blighted with student debt upon graduation.
3. The amount per person in lost wealth is a massive $134,000
The Demos study also tells us that of this $134,000, almost two-thirds of this is money that takes a big slice out of potential retirement savings.
Consequences: College graduates with student loans to repay are able to save on average $88,440 less for their retirement than their non-indebted peers.
4. Households with a lot of debt all have lower incomes than houses without debt
Debt is also an indicator for generally lower earnings over a lifetime. Demos’ model demonstrates that graduated with student loans earn more money to begin with than their classmates without loans. However, over time, the earning disparity between the two shrinks, with debt-free graduates’ salaries quickly increasing more than their peers with student loans to repay.
Consequences: Workers with student loan debt will not be able to change careers as readily as those without the financial stresses of meeting monthly loan repayments.
5. People with student loans to repay also pay more for their properties.
There is a clear link between education-related debt and higher interest rates, greater monthly mortgage payments and more associated costs with paying for their homes.
Consequences: Debt-free individuals and households can buy homes that cost more, but put down larger down payments due to having more disposable incomes thanks to not having student loan debts. The bigger down payment means less interest on the loan. For those with student debts, they experience the opposite of this and will miss out on $138,666 in home equity as a result of paying more for their home.
Do the findings of this survey ring true to you? How long did it take you to repay your student loans? Are you still paying them off? What aspects of your finances have suffered the most as a result? Tell out readers what you think by sharing your thoughts in our comments’ section, below.
