August 07, 2013 by Clarise McCants
While most of us can’t imagine how our debt could be any more financially damaging, a new study from Demos predicts that the real impact of student debt over a lifetime will be nearly four times the amount originally borrowed. According to At What Cost: How Student Debt Reduces Lifetime Wealth, a two-person household with $53,000 in debt will end up losing $208,000 in wealth over their lifetime.
And, at a higher level, the $1 trillion in outstanding student loan debt across the nation will lead to total lifetime wealth loss of $4 trillion. This model paints a terrifying picture, especially given that it was developed based on the “best-case scenario” for students with debt.
“The 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.”
In reality, students with higher levels of debt—students from low-income families, students of color, and those who attended for-profit colleges—will be even worse off. A more detailed brief on the specific impact of student debt on households like these is forthcoming.
Of the total $208,000 wealth loss, nearly two-thirds ($134,000) comes from lower retirement savings; while more than one-third ($70,000) comes from lower home equity. The study arrives at these numbers by considering a number of factors:
- Young people with student loan debt are able to save significantly less for retirement while they’re working to pay off loans.
- More debt-free graduates are able to purchase homes when they were young, put down a larger down payment, and paid a lower mortgage interest rate than those with debt.
- And, people with student loan debt end up earning less income by the time they get older than those that are debt-free.
Demos’ report is yet another clear illustration of how the “debt for diploma” system is ruining our economic futures. And it’s the reason many of us, who just can’t afford it, are forced to undercut our academic choices. According to a recent study from Georgetown University on racial inequality within higher education, many students of color are missing from university classrooms due to financial need. The report, Separate and Unequal, claims that 111,000 African American and Hispanic students either do not attend college or drop out due in part to a lack of financial means.
However, the Huffington Post’s article on the report points out why you’re still better off going to college than not:
“Still, despite the burden of student loans, attending college may be worth the investment. Students who complete just ’some college’ earn $100,000 more on average over a lifetime than their peers with a high school diploma, a June analysis from the Hamilton Project found.”
But that begs the question, why should we have to be in debt to go to college? A lifetime of wealth loss shouldn’t be a prerequisite for higher education.