The real student loan crisis

By Robert Hiltonsmith
August 1, 2013

A month has passed since Congress allowed interest rates on federal student loans to double for some borrowers, increasing the cost of their college educations by as much as $4,500. While the debate continues to focus on the interest rate for future borrowers, it is ignoring the larger problem with student debt: the more than $1 trillion that had already been borrowed before the interest rate debate. This existing debt will continue to drag down borrowers’ financial security, which in turn drags down the entire economy. By how much? Demos, the public policy group where I work, has just released a study that estimates the economic impact of the existing student debt burden, and finds that it may cost the country more than $4 trillion in lost economic activity.

This economic drag happens because student loan payments take a significant bite out of many borrowers’ incomes, causing them to delay or forego important purchases or investments. A recent study by the American Institute of CPAs found that 75 percent of student debtors had made personal or financial sacrifices because of their student loan payments. Forty-one percent have postponed contributions to retirement plans, 40 percent have delayed car purchases, and 29 percent have put off buying a house. The effects of delaying making these crucial investments early in borrowers’ lives, in turn, are magnified because of the amount that the lost home equity and investment returns would have compounded over their entire working lifetimes.

Our study tries to estimate just how much delaying saving for retirement or purchasing a home will cost borrowers over their lifetimes. We use data from the Federal Reserve’s 2010 Survey of Consumer Finances (SCF) to determine the average salary, retirement savings, and liquid savings of an average, young, dual-headed, college-educated household both with and without education debt. We then project their salary and assets over a lifetime using generally-accepted values for salary growth, savings rates, investment returns, etc. We reduce the savings of the indebted household by their monthly student loan payment while they are repaying their loan, and observe the difference in net worth between the debt-free and indebted households as they approach retirement.

The model finds that a dual-headed, college educated household that graduates with an average amount of debt ($53,000) will lose more than $200,000 in retirement savings and home equity from paying off their student loans, compared to a similarly educated household without student debt. Nearly two-thirds of this lost wealth is due to the indebted household’s lower retirement savings while paying off their student loans, while more than a third is from lower home equity. (Our model does not factor in any reduction in spending that the couple makes aside from what they spend on a home and retirement savings.) The lower home equity was primarily due to the finding, calculated from the SCF data, that indebted households bought less expensive houses than similar debt-free households. They also put less money down and paid a higher interest rate. These lost returns and appreciation on the foregone retirement savings and home equity are magnified because they occur so early in borrowers’ lives. And this is exactly why I argue that the existing student debt burden already weighing on nearly 40 million Americans is the greater crisis: because student debt causes borrowers to delay making investments at the very time when making those investments is so crucial to their future financial security.

The impact of student debt on financial security will be even greater on many borrowers, however, because our brief’s calculation of the wealth loss caused by student debt is, in many ways, a best-case scenario. The $200,000 estimate for lost wealth is for an average dual-income household where both partners graduated from four-year public universities and are never unemployed and always save thereafter, but the large number of graduates from less-ideal circumstances face even greater losses. As our brief highlights, students who graduated from private not-for-profit schools, students of color, and students from low-income families graduate with larger average debt burdens than the average public school graduate. Seventy-five percent of students from families with incomes less than $60,000 graduate with student loan debt, a higher share than the 66 percent of graduates overall who do. More students at private not-for-profit colleges graduate with debt, and more of it: as of 2008, an average of $27,650, about a third more than public school grads. But the hardest hit by student debt are for-profit college students. Not only do they graduate with the highest average debt ($33,050) but they’re also less likely, for various reasons, to find a job after school. The wealth loss from their student debt is so large that some for-profit graduates are effectively “underwater” on their college investment: they will actually have a lower lifetime net worth than if they hadn’t gone to school at all.

This “debt-for-diploma” system is clearly unsustainable, both for students and the country as a whole. The wealth losses caused by heavy student debt burdens are eating away at the income gains from a college degree, thus eroding the last secure pathway to the middle class in this country. And though student debt won’t cause an economic crash like mortgage debt — largely because of unfair laws that prevent discharging student debt in bankruptcy — its impact on the economy will still be catastrophic. If we spread out our estimated $4 trillion in lost economic activity from student debt over ten years, we can predict that student debt may directly reduce GDP growth by as much as 2 percent per year, not even accounting for student debt’s indirect effects on the economy. And let’s not forget about the millions of borrowers at risk of defaulting on their student loans. Thirty-five percent of borrowers under 30 currently repaying their loans are more than 90 days late on their payments; many will default, and thus have their credit ruined and be unable to buy a house, among other consequences. So, after Congress fixes student loan interest rates, it shouldn’t stop there. It needs to enact larger legislation that will give relief to borrowers already weighed down by debt, or the entire country will pay the price. 

PHOTO: Graduating students arrive for Commencement Exercises at Boston College in Boston, Massachusetts May 20, 2013.   REUTERS/Brian Snyder | CHART: Courtesy of Demos

30 comments

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You’re an interesting character OOTS. I like your architecture.

Posted by tmc | Report as abusive

@OOTS, you didn’t get your aircraft hangar and man-made ponds on Social Security.

There is nothing wrong with living in an urban apartment, but there is also nothing wrong with wanting an acre in the suburbs, or a small orchard with a few personal fruit trees, or 500 acres of land to grow corn, or a high rise loft in the middle of New York City.

Basically, what you’re telling us is that you’ve already had the opportunity to live the American Dream, and now, in retirement, you have the luxury of living any way you wish, (even on Social Security) because you came from a generation when the cards weren’t so desperately stacked against you.

I’m not criticizing the way you live, it sounds lovely, and however you achieved it is none of my business, but paintcan is right when he observed:

“OOTS – you really don’t understand the modern world and talk like an affluent person [who] dresses down…”

The thing I really don’t like about your posts is not only how you “dress down” but “talk down” or outright insult people. For example, when you and I agreed on ONE topic (Social Security – which of course, you’re invested in personally; you must have it now because as you reveal here, it’s your only source of income) you were relatively friendly, although patronizing and condescending. But when I disagree with you, you blast me with “that’s typical female thinking” and call me a “moron”. I’m not the only poster you do that to, either.

Now I find out you have lots of luxuries: the luxury of time, the luxury of hobbies such as fruit trees and personally designed housing and water conservation systems, compliments of an American Dream that is now in grave peril. And you tell us to lower our sites.

Some of us are arguing, fighting, etc., so that our children (mine is NOT a “hobby”, thank you) can have some of the same opportunity you and I did. Will they all achieve it? Nope. Should they have the chance? Of course.

But you, and others, say that because our economy is so rotten we should just suck it up and aim lower. I choose to not give the bully my milk money everyday.

And I will defend as best I can your right to every dime of your Social Security money so that you can wear flip-flops, sleep until 11 a.m., and water your trees from your ponds.

Corporations, in bed with Wall Street, in bed with Congress are consistently undermining the American lifestyle, American strength, individualism, creativity, intelligence, education and character.

But that’s okay with you, because you’ve already gotten yours, right?

I read this line in the poem “Easter Morning” by Jim Harrison, taken from The Writers Almanac with Garrison Keillor, May 18th 2008 online publication:

“that when there’s lightning the rich /
think that God is taking their picture”

Reminds me of you.

Posted by JL4 | Report as abusive

@JL4,

I am 72 years old, purchased my property 23 years ago, designed and built my hangar twenty years ago, dug my new pond not long after, and enlarged the one next to my homesite a decade ago, before the “Great Recession”. In order to accrue the assets to do these things over time I HAD to “understand the modern world…”.

In any debate of values it is entirely legitimate to point out logical lapses or flaws in reasoning or any position based on values one does not recognize or share. If that makes you or your position look bad, you have the right to present more facts or to withdraw. Most of the time you choose the latter.

We have some very intelligent people contributing ideas and opinions here and we also have those whose thinking and expectations are unquestionably moronic. That said, it is not my style to call anyone a moron.
There are more than a few with whom I agree on some subjects and disagree on others. That is as it should be.

Yes, I prefer to agree, when possible, and work towards collective consensus than to disagree. When someone debates well for an opposing view I grant them due respect and “agree to disagree”. Those who pop up here and there with blatant silliness, unable to give credibility to their verbage, do get the “back of my tongue” for good reason.

As an example, you believe “Corporations, in bed with Wall Street, in bed with Congress are consistently undermining the American lifestyle, American strength, individualism, creativity, intelligence, education and character.” Please. You thus attack everything and nothing. That’s just silly.

A corporation is but one form of business. “Business” is commerce, the very foundation of economic success everywhere in the world. And yet you speak of this vehicle your children MUST harness or serve with contempt and disrespect. Such ignorance and prejudice is offensive in those who seek to pursuade.

“Wall Street” is a market in which the great majority of participants, directly or indirectly are individuals (or their pension funds or 401Ks, etc. try to preserve or enlarge financial assets they would put forward for a better future rather than spend today or sit back and see our government inflate and thus reduce it’s purchasing power. Yet you paint this venerable institution with a wide black brush just because it exists. That’s just silly.

Those who manipulate that market inappropriately steal from all of us. They are few, but powerful; and I agree that at present they seem utterly untouchable and unaccountable. These people should be dragged from their pedestals ignobly and conspicuously in public, brought before appropriate courts, prosecuted for their crimes and thrown in jail to serve long sentences.

But to do that, you have to perceive the “real world”, identify the actual villains, and go after THEM. You can’t just complain in general, take the few “little people” they will offer up to you, and go about business as usual (which is the usual result).

I agree that the incestuous relationship of our collective Congress and individual politicians and the major parties with lobbyists are an increasing obscenity, again accountable today to no one. But we do not change that by climbing the hill and shooting a shotgun in every direction of the compass. One must choose specific targets believed responsible, and bring them down one by one such that others become aware they are similarly vulnerable if they do not change their ways.

If you would advocate for your children successfully you must do so honestly. In a world of SEVEN BILLION they are NOT necessary. All who are growing up today will live a life totally different from that of you and I whether they “lower their sights” or not. Denial is not a strategy.

America remains a “work in progress more than two centuries after it’s founding. More and more complain because it’s progress towards sustainable perfection is not faster and not complete. They don’t want to WORK to bring perfection about, they just WANT IT, NOW!

What “undermines” the American lifestyle, American strength, individualism, creativity, intelligence, education and character is today’s desire for “instant gratification”. Our schools DO NOT reward “individualism, creativity, intelligence…and character”.

They instead force feed young minds “uninspired factual formula” to be regurgitated into multiple choice blanks on a test page. They actively discourage individuality or individual creativity or thinking, or innovative application of assimilated facts. Most emerge from the process believing that profit is a bad thing. Garbage in, garbage out.

I have worked my way up in design, then construction supervision, then construction paralegal, and finally founded, ran and sold a successful business. If I cannot enjoy my “luxuries” at 72, then when?

If you (and those like you) would appropriate my accumulated assets and expend it on future generations, don’t expect my meek and willing compliance. Teach you children to fish for themselves, not just take mine.

Posted by OneOfTheSheep | Report as abusive

I’m not retreating, OOTS. I read what you respond to me with – I just choose to ignore you more often than you like.

Posted by JL4 | Report as abusive

@ AlkalineState

I agree with the part about being able to graduate from high school/college in six years, though not for the same reasons. If people simply weren’t given all summer off, but expected to study through most of that time, then it could be achieved. It would be a big savings for everyone. High schoolers would be less bored through the summer and wouldn’t forget what they’d studied already, and college students could get into the work force sooner or whatever they’re going to do after their bachelors.

Posted by Calfri | Report as abusive

Very well answered @OOTS. I also berate corporate America (The USCA) but I do understand that it is what we the people made it. They are doing exactly what they are supposed to do. We can’t punish ALL of it, just those that did actually commit crimes. And that ain’t many. Just trying to find and prosecute them is like hunting needles in a hay stack. Instead we need to change the system. I think I’ve stated how that needs to occur many times. Term limits etc..
@JL$, I am one of those “kids” of yours and OOTS. And I too agree with him that we need to change the American dream. We can’t have what you had. It’s just not possible anymore. the world changed while you were diligently working towards your dream. I want my generation not to set its sights lower, but to set them higher in different ways. I don’t want to worry about retirement. That word means little to me, it’s something from a by-gone era.

Posted by tmc | Report as abusive

@tmc,

You got it! Thanks for the kind words. And I give due credit to FlashRooster for his patience and persistence in bringing me to perceive that “the system” as it has become today is having adverse effects on our society that MUST be better understood and mitigated. i.e. it “must be changed”.

Yes, in recent years it is increasingly apparent that most American’s “cheese has been moved”. And yes, different goals need not be lower. But you, too, will grow old and step or be thrown aside so others can “carry the torch”.

It would be tragic indeed if, at such time, there is no “financial floor” to support you with some dignity until your demise. If “golden years” are no longer possible, America should promise and deliver more than “hunger and poverty years”.

If this country rolls out the welcome wagon to twenty million illegal alien fence jumping squatters and their every living relative from third world countries south of the Rio Grande, all bets are off for the future. America owes more to IT’S OWN than what this will bring.

Posted by OneOfTheSheep | Report as abusive

There are many interesting words and personal anecdotes, but not a lot of solutions above.

First, let us try a little divide and conquer on the problem. There are loans being made for students at often worthless for-profit schools, loans being made to students pursuing degrees (e.g., STEM majors) that contribute to the national good, and loans being made for degrees that the student hopes will be to their personal benefit but not society so much (advertising, BBA, etc).

I will propose a nice solution for the for-profit category. The for-profit school must guarantee payment of all student loans made for study at their school. If the student is involuntarily unemployed, the school must make the payments. If enacted, this would shut down the current racketeers. If debated at all, you will quickly find out which politicians are in the pockets of the for-profit school racket.

Posted by QuietThinker | Report as abusive

The problem is quite simple, remove undue hardship and the Brunner test and allow dischargeability in student loans. As long as student loans continue to have no statue of limitations, predatory lending, lack of fair debt collection practices, and no bankruptcy protections the problem will get worse.

Posted by McAwesome | Report as abusive

The “Free Lunch” crowd is alive and well among the Reuters readers.

The Capitalist system has made the United States the envy of the world. Now, the younger, “skulls full of mush” think socialism is the answer. Please identify where in teh world, anywhere in the world any economy has come close to the success of the United States?

Central planning societies ALWAYS FAIL!

Gimmie, gimmie, gimmie – the cry of those that haven’t earned much of anything, but want everything, NOW, just like they behaved at home, with their parents.

SPOILED BRATS!

Posted by DonRS | Report as abusive