Guest Blog Series: The Student Loan (Financial) Shuffle

Editor’s note: This is the second in a series of posts by Melinda Lewis, Policy Director of the Assets and Education Initiative at the University of Kansas examining the relationship between student loans, education, and asset building. This series previews an event on Thursday, November 7th featuring Asset Building Program Senior Fellow Willie Elliott exploring these issues. You will be able to watch the event live here beginning at 1 pm EST.

In the first post in this series, I discussed how student loans can create barriers to entering college and saddle those who do with heavy amounts of debt. The rest of the story is how this debt can erode the future prosperity that a college degree is supposed to secure.

AEDI’s analysis, conducted by New America Foundation Senior Fellow Dr. William Elliott, finds that outstanding student debt can have a negative effect on household net worth. Specifically, median 2009 net worth for a household with no outstanding student debt is nearly three times higher than for a household with outstanding student debt. Disturbingly, too, the recession seemed to hit households with student debt harder than those without.

What might this look like for a real American household? A hypothetical household with exactly median 2007 net worth ($128,828) with outstanding student loans is associated with a loss of about 54% in 2009 net worth compared with a household with similar net worth but no student debt. 

Because assets can be leveraged for educational access for subsequent generations, student loan debt may erode higher education as a path to future economic mobility. Some research finds, for example, that for every $10,000 of home equity gains, the likelihood that low- and middle-income students enroll in college increases by six percentage points. But, here, too, aspiring homeowners are hindered by high-dollar student loans. Median 2009 home equity for a household without outstanding student debt ($115,987) is nearly two times higher than for a household with outstanding student debt ($68,349) and similar levels of home equity.

Similarly, college graduates, even as they are advantaged by their relatively greater earning potential, may struggle to save enough for retirement if they are burdened by high-dollar debt. The median 2009 retirement savings for a household without outstanding student debt ($55,000) is just over two times higher than for a household with outstanding student debt ($25,000) and similar levels of wealth. The recent ‘Great Recession’ decimated retirement holdings of nearly all Americans, but those with outstanding student debt suffered particularly. Living in a household with a four-year college graduate, outstanding student debt and median 2007 retirement savings ($80,983) incur a loss of 52% of total retirement savings in 2009 compared with a household with a four-year college graduate, similar levels of retirement savings, and no outstanding student debt.

AEDI is not alone in questioning the connection between student debt and erosion of asset positions. Robert Hiltonsmith of Demos, who will appear on a panel at the University of Kansas where AEDI will release the report on November 7, finds that an average student debt burden for a dual-headed household with bachelors’ degrees from four-year universities leads to a lifetime wealth loss of nearly $208,000. Over time, students with outstanding student debt make up some of the wealth loss, likely through leveraging increased human capital into earnings potential. However, it appears that they still end up far behind their peers without student debt.

As the U.S. considers options to address the effects of student loans, findings like these suggest that the debate should go far beyond examining interest rates or innovating repayment schedules. Instead, we need a collective accounting for the potentially lifelong effects of student debt on household financial well-being. And we need to ask ourselves whether, when it comes to financial aid, we’re building the strongest collective future with our foundation of borrowing.