Student Loan Debt May Put Young Adults in Financially Precarious Standing

Student loan debt has been in the news a lot these days. In the last week, a number of news outlets wrote about mounting student loan debt and the delaying of life events by their borrowers (see ABC News, the Chronicle of Higher Education, CNN Money, the NY Times [here and here], and the Wall Street Journal, to name a few). The article in the NY Times provides a great example of this, "Consider Shane Gill, a 33-year-old high-school teacher in New York City. He does not have a car. He does not own a home. He is not married. And he is no anomaly: like hundreds of thousands of others in his generation, he has put off such major purchases or decisions in part because of his debts."

 Some research at the Assets and Education Initiative (AEDI) at the University of Kansas School of Social Welfare looks at how young adults delay life events when they have outstanding student loans. Specifically, AEDI has asked whether having outstanding student loans relate to accumulating less wealth in young adulthood, placing young adults in more precarious financial standings? A paper by Drs. William Elliott and Ilsung Nam, presented at a research symposium at the Federal Reserve Bank of St. Louis in February, finds that living in a household with a four-year college graduate with outstanding student loan debt is associated with a net worth loss of about 63% ($185,995.90 less) compared to living in a household with a four-year college graduate without outstanding student loan debt. In other words, outstanding student loan debt may reduce financial stability by reducing their net worth.

In part, the potential reduction in financial stability and delay of life events are the impetus for the Consumer Finance Protection Bureau's (CFPB) recent report on student loan affordability. The CFPB's report describes policy implications based on 28,000 comments solicited from financial institutions, colleges and universities, professional associations representing health professionals and educators, housing finance experts, students, and families. Most of these implications center around making repayment programs more user friendly and affordable, or making the application process more transparent.

But what about reducing the need for student loans to begin with? This is the potential of asset-building and children's savings: potentially reducing the need for high-dollar student loans by emphasizing saving. Another paper written by Drs. Elliott and Nam and made available by the Center for Social Development explores the relationship between saving and student loan debt. They find evidence suggesting that parents' college savings may reduce the probability that students accrue high-dollar student loan debt across all income levels with the exception of high-income students. While it may be unlikely that all students will be able to save enough to completely pay for college without any loans (particularly for students from poor households and in absence of supportive programs to help them save), saving may be one way to help lessen reliance on student loans and to help young adults experience financial stability post-college.