Thursday, February 12, 2015

"How student debt reduces lifetime wealth"

That's the subtitle of a very interesting article at Demos.  Here's an excerpt.

Student debt has skyrocketed over the past decade, quadrupling from just $240 billion in 2003 to more than $1 trillion today. If current borrowing patterns continue, student debt levels will reach $2 trillion in 2025. Average debt levels have risen rapidly as well: two-thirds (66 percent) of college seniors now graduate with an average of $26,600 in student loans, up from 41 percent in 1989. The rise of this “debt-for-diploma” system over the past decade was largely caused by the sharp decline in state funding for higher education, which has fallen by 25 percent since its peak in 2000.

However, despite the fact that student debt is now nearly a prerequisite for a college degree, we have not yet fully explored the impact of tying opportunity to debt. Though a college education remains the surest path to a middle-class life, evidence has begun to mount that student debt may be far more detrimental to financial futures than once thought, particularly for those with the highest levels of debt: students of color and students from low-income families.

This brief attempts to quantify just how much these soaring debt levels impact college-educated households’ financial stability over a lifetime. It creates a model using data from the Federal Reserve Board’s Survey of Consumer Finances and other datasets to estimate household debt and assets, comparing the projected debts and assets of a college-educated household with average levels of education debt to a similar household without debt. It finds that, over a lifetime of employment and saving, $53,000 in education debt leads to a wealth loss of nearly $208,000.

We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households, not even accounting for the heavy impact of defaults.

There's more at the link, going into a lot more detail about those numbers.  If you are studying for a degree, planning to study for one, or have children or other relatives who are or are planning to do so, you really need to read the whole thing.  Demos appears to be a left-of-center/progressive organization, but don't let that stop you reading more;  their political orientation doesn't affect the reality they discuss in this article.

I have four university qualifications, all obtained through part-time study while working and earning my living.  I was never in debt at all, paying for each year's study out of the earnings of the previous year;  and because distance education is so much cheaper than full-time tuition, I saved a bundle.  If I had kids today who wanted a basic degree in almost any discipline, that's the recipe I'd recommend to them.  Sure, there are certain fields where full-time study is mandatory (e.g. medicine, engineering, etc.), but even there the preliminary qualifications can be obtained part-time.  It makes so much financial sense that I'm mind-boggled more people aren't doing that.  Yes, it takes greater self-discipline, but it also teaches self-discipline - something that'll stand kids in good stead later in life.  What's not to like?



Paul, Dammit! said...

I believe I was extremely fortunate to have been forced into a better career track than I had planned for myself... too bad it was student loan debt that did it, but my original career choice as a marine scientist didn't pay the bills. Running away to sea did, OTOH, and I learned that I had an upside-down view of who the good guys were.

I told my son that he'd best plan on ROTC if he doesn't get a free ride into college. No way I can pay cash for the equivalent of another house, and no way I want him to be like I was and 25 years old with 110k in student loan debt w/ $10/hr job offers.

Anonymous said...

Looked up the local public university here in AZ - 10K for 2 fulltime semesters.
If I could swing 10k in disposable income, I'm not sure I'd need college.