Peschke: How student loans can damage lifetime wealth

New research points to a lasting negative effect of student loan debt on lifetime net worth.

The repayment of loans and the years it takes to repay them can take a significant bite out of retirement savings combined with loss of equity for homeowners. Student debt in the U.S currently approaches $1 trillion, and, if current borrowing continues, the figure will reach $2 trillion by 2025.

A report produced by Demos, a national nonpartisan public policy group, calculates that a current education debt of $53,000 translates to a $208,000 loss of lifetime wealth. The report is titled “At What Cost: How Student Debt Reduces Lifetime Wealth.” It can be predicted that each $1 trillion in outstanding student debt will lead to a lifetime loss of wealth of $4 trillion for indebted households, not counting the impact of defaults.

It has long been assumed that a college education paves the way to a middle-class life, but for minorities and low-income students, who bear the highest level of debt, the future may be dimmed by the reduction of lifetime financial security.

The effect of student loan debt on graduates from lower-income families is much more damaging than on families with higher incomes. Seventy-five percent of bachelor’s degree graduates from families earning less than $60,000 leave college with some student loan debt compared with only 48 percent of students from families earning more than $100,000 and 14 percent of graduates from lower-income families graduate with more than $30,500 debt compared with just 9 percent of students whose families are in the higher-income brackets.

According to Demos, ethnicity plays a large part in the disparity of debt incurred by students.

In 2008, 80 of black graduates left college with debt. This compares with only 67 percent of Latinos, 65 percent of Caucasians and 54 percent of Asians. Blacks also had a higher level of post-graduation debt, averaging more than $28,000, which is nearly $4,000 more than the average graduate debt.

This disparity in debt related to ethnicity is even more disturbing, since the unemployment rate of minorities is significantly higher than that of white graduates and can be expected to result in higher delinquency rates. One thing to note is graduates from for-profit schools leave with an average debt of $33,050, which is 64 percent higher than that of public school graduates.

While it’s true that the employment rate for 20 to 24-year-olds is higher (87 percent) for those with at least a bachelor’s degree than those who have only completed high school or less (48 percent), the escalating cost of college becomes harder and harder to justify.

The effect of unemployment for those graduates with student loans means increasing delinquency. In the third quarter of 2012, 11 percent of student loans were at least 90 days past due.

Student loans have become the largest form of consumer debt, excluding mortgages. Federal ownership of student loans has reached more than $500 billion.

What’s more, the rapid expansion of student debt not only has a deleterious effect on the student borrowers, it provides a significant drag on the economy by reducing the buying power of those struggling to repay their debt. For the already sluggish economy, this is truly devastating news. We need all the buying power we can get to bring us back to a robust national economic plateau.

Two major damaging effects on the lifetime financial security of graduates can be ascribed to student loan debt. Graduates who spend years paying off their debt are unable to put aside the savings they will need for retirement, and payments for student loan reduction are diverted from increasing home equity investment. Even for indebted students making more than their debt-free contemporaries, their net income will begin to lag significantly in their 40s and 50s.

What this means to students beginning college and to the economy as a whole is smart decisions need to be made now. The basic rule of thumb is: Do not borrow more for your education than you expect to make in one year after graduating. Choose your curriculum carefully and research the success rates for employment from the colleges you want to attend.

Consider the value of attending community college with transferable credits to a four-year institution. Don’t overlook the advantages of vocational education when considering job opportunities and personal satisfaction. Consider the financial advantages of living at home, rather than incurring travel and board expenses. Be sure you understand the different kinds of loans before applying. Helpful information is available at Call me at 815-338-5757 for a free copy of “Repaying Your Student Loans.”

• Virginia Peschke is executive director of Consumer Credit Counseling Service of McHenry County in Woodstock. 

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