Student debt undermines wealth accumulation

Student debt undermines wealth accumulation, with households headed by young adults burdened with student debts building up wealth far more slowly than their student-debt-free peers, researchers from the Pew Research Center found in a new study.

Approximately 37% of all American households headed by somebody less than 40 years of age have some student debt. The average student-debt outstanding is about $13,000.

After gathering and analyzing data from the most recent Survey of Consumer Finances, the authors found that households headed by a young college-educated adult with no student debt had an average net worth of $64,000, compared to $8,700 among their peers with student debts – a sevenfold difference in net worth.

There is also a large wealth gap when young adults without a bachelor’s degree were compared. Households headed by people without any student debt had a net worth nine times greater than their debt-laden counterparts – $10,900 compared to $1,200. This holds true even though the debtors and non-debtors in the study had almost identical household incomes in each group.

Other factors are at work

While these clear differences in net worth may be explained partly by outstanding student debt, it is only part of the story. With an average outstanding student debt ($13,000) much lower than the differences in net worth, clearly other factors are also at work.

Individuals with student debts accumulate less wealth because they tend to owe comparatively large amounts of other debts as well, such as credit card debts and car loans, etc.

Head of household graduates with student debts were found to have an average household debt of $137,000, compared to $73,000 among households led by graduates with no student debts.

In less-educated households total student debt averaged $28,300, compared to $2,500 in households led by individuals with student debts – a tenfold difference.

Student loan for bachelor’s degree does pay off

While taking out a loan to finance a college degree is linked to having a lower net worth, the bachelor’s degree does eventually pay off in other ways, especially in terms of household income.

College-educated head of households with a student debt have an average income of $57,951, compared to $32,528 earned by head of households of the same age with no bachelor’s degree.

According to a recent Pew Research study, the income gap today between young college graduates and those with no college degree is much bigger than in previous generations.

The authors point out that their analysis does not address the wider question regarding which factors might be causing student debtors to take on more overall debt. Perhaps the burden of student debt makes it harder for young adults to gain financial traction elsewhere.

More young people are enrolling in college today than before, and from a wider socioeconomic spectrum. Maybe the difference in net worth simply reflects different socioeconomic origins – those with student debts come from households with less income, i.e. they get less financial help from their families and need to continue taking on more debts after leaving college.

The study findings echo the association between student debt levels and individual economic well-being. Young adult college graduates with student debts are generally less satisfied with their overall personal financial situation compared to those who went through college without borrowing any money.

Those who graduate with a bachelor’s degree and student debts are also less likely to experience an immediate payoff for the investment they made in their education.

Student debt and other debts

The researchers found that people with student debts tended to owe more on other types of debts:

  • 43% of student-debtor graduates also had vehicle loan debts, compared to 27% of graduates with no student debts.
  • 60% of student-debtor graduates also had credit card debts, versus 39% among their peers with no student debts.

Even though households led by earners with student debts had larger total debt burdens, indebtedness needs to be assessed in the context of the economic resources of the household, i.e. those with higher incomes and assets may be able to take on greater debts.

The authors wrote:

“Using the conventional total debt-to-income ratio, where debt is measured as a share of income, college-educated student debtors are by far the most indebted.2 The median college-educated student debtor has total debt equal to about two years’ worth of household income (205%).”

“By comparison, college-educated households without student debt and less educated households with student debt have total debts on the order of one year’s worth of household income (108% and 100%, respectively).”

Accumulated household debt among all households reached a peak in late 2008, soon after the financial crisis hit. According to the Survey of Consumer Finances, between 2007 and 2010, younger households were reducing their overall debt burdens more rapidly than older households.

Student debt became the second largest debt in US households

However, even as younger heads of households were reducing their levels of indebtedness faster than the older heads of households, their outstanding volume of student debt increased during the Great Recession. By the end of 2009, student debt overtook credit card debt as the second biggest type of debt owed by households in the United States, after mortgages.

Why would a household’s total indebtedness fall while the student loan debt rose? One has to examine the debt burdens that exist in the younger households. On average, young households with no student debt have seen falling debt burdens since 2007. Among college-educated households with no student debt, the average debt-to-income ratio declined from 127% in 2007 to 108% in 2010.

Not all young households have experienced the same rate of decline in indebtedness. Those with student debts have seen their debt-to-income ratios increase from 2007 to 2010.