What’s the deal with student debt?

Many financial experts and economists have declared student debt to be a national crisis. In this blog, we share some facts you probably don’t know about student loans. We believe this information is important regardless of whether you are a current borrower, a retiree, or 100% debt free.  

Student Debt:

Student debt has become a concerning issue for the nearly 44 million Americans that collectively have more than $1.6 trillion in education-related debt. The more concerning problem is that these figures continue to grow on an annual basis. Simultaneously, advanced technologies are making it more and more difficult to earn a respectable salary without an advanced degree of some sort. This means as college grows more and more expensive, it is also growing increasingly important. This scenario has put students in a position that encourages taking on sometimes excessive amounts of debt to fund their education, unless they want to bypass the potential benefits associated with a traditional college degree. We believe this is an important and growing issue that will continue to impact the economy at large.

Statistics:

According to EducationData.org, student loan debt currently grows approximately six times faster than the nation’s economy. The student loan debt growth outpaces the growth of U.S. GDP by 513%.  A total of 43.2 million student borrowers each have an estimated average of $39,351 in student loan debt. The average student attending a public university for their undergraduate bachelor’s degree will take on about $30,030 in student debt to cover this cost. As you can imagine, the average level of debt is considerably higher for those who wish to attend a private college or university. In 2020, total private student loan debt increased by about 14% which is equivalent to a $16.8 billion increase.

In addition to these alarming statistics, student loan debt tends to have disparate impacts on certain individuals and groups. Studies indicate that individuals who are first-generation college students are more than twice as likely to report late student loan payments. Similarly, for-profit, private college graduates are more than twice as likely to make late payments on their student loans. An estimated 3.3 million people, equivalent to 15.1% of student loan borrowers, that are under the age of 40 are currently behind on their payments towards their student loans. An additional 338,608 people of the 17% of student borrowers under the age of 25 are behind on their student loan payments.

Some additional facts to consider:

-58% of all student loan debt currently belongs to women.

-The parents of male students are more likely to help fund their education with loans than for their female counterparts.

-More than 50% of Black student borrowers report their net worth to be less than what they owe in student loan debt.

-Within four years of graduating, 48% of Black borrowers owe an average of 12.5% more than they borrowed. Over this same period, 83% of White students owe 12% less than they borrowed.

-American Indian and Alaska Native student borrowers tend to have the highest monthly payments for their student debt. They are followed by Black and African American borrowers who are the second-most likely to have a monthly payment greater than $350.

 Based on this data alone, it is clear that student debt can affect people very differently and tends to have a lasting, disparate impact on certain minorities. For more information about some of the ways college loan debt is unequally impacting certain communities, we’ve shared this CNBC article as well as this article from the Brookings Institute.

How does student debt affect individual’s post-grad?

Many people fail to consider the lasting impact of student debt post-grad. Sources say that 36% of borrowers have put off buying a home as a result of their current levels of debt. Similarly, 21% of borrowers have delayed getting married and 26% have decided to hold off on having children as a result. These post-grad impacts come in addition to the mental toll that debt has on students while in their degree programs. A student at Columbia University stated in a CNBC Make It interview, “I do have student debt and it is one of the reasons why I cannot even enjoy being a student here, because every semester I have to worry if I have enough money to go to school next semester.” This statement alone helps to demonstrate the effects of student debt on the mental health of students both during and after their time at college. Furthermore, 23% of student loan borrowers that have outstanding debt related to their education also have a balance on their credit card. 4% of borrowers with educational debt at some point use a home equity loan and 11% use another type of loan. Nearly 11% of those borrowing to help pay for the education of either a child or a grandchild have utilized a home equity loan. Consider this quote when trying to understand the affects of debt on student borrowers, according to a 2018 study conducted by the Center for Retirement Research at Boston College, “Those with debt have only about half as much in assets by age 30 as those without debt.” This statement further reinforces the lasting impact of student debt on individuals, even after it is paid off. The value of beginning to save for retirement early in career is immense due to the power of compounding interest. So, with substantial amounts of debt to worry about, it’s no surprise that the impact can be lasting and severe.

How does student debt affect the economy?

Whether or not you find yourself feeling empathetic for student borrowers and the effects of debt on their lives post-grad, the effects of education-related debt are more far-reaching than one might realize. No matter how you look at it, student loan debt is an economic drag. This is due to some of the same implications previously discussed. Students with high levels of outstanding debt are less likely to get married, buy a home, take out a car loan, and much more. Generally, student borrowers struggling with their debt may have lower credit scores and may avoid loans entirely. According to the Brookings Institute, current predictions state that the rate of student loan default could reach nearly 40% by 2023. The existing level of debt alongside the growing rate of student loan default could have the potential to slow economic growth by preventing individuals from fully participating in the economy. According to Student Loan Hero and the Washington Post here’s how…

Growing student loan debt has the potential to….

• Slow the growth of new businesses and entrepreneurial ventures, particularly as it relates to small business formation.

• Lower the rate of homeownership or delay the average age at which individuals are purchasing homes.

• Delay the rate and timing of “traditional life milestones” such as getting married, having children, retiring.

• Make it more difficult for individuals to survive in a recessionary economic environment.

• Hinder or prevent the rate of savings necessary for a successful retirement.

• Suppress general consumer spending in the economy, such as for vehicles, travel, luxury goods, and more.

• Cause students to set aside their dreams. Research shows that having debt reduces the chance that students will be “choosy” in the job market. Instead, students are inclined to accept part-time jobs and work unrelated to their degree in order to pay off their loans.

So, how can we help?

At Johndrow Wealth Management our team recognizes the importance of student loans to help fund a meaningful education that will serve as a springboard for a valuable career, but we also understand the severity of poor financial choices. Maggie, a partner and financial advisor on the team, prides herself in being a “student loan maven”. She has seen in her work that student loan debt is a challenge that even the highest-net-worth millennials are facing. Maggie, and the rest of the team at Johndrow Wealth, strive to help you and your family make the best decisions at it relates to student loans in the hopes that we can help you strike a balance between following your dreams, pursuing a robust educational experience, and making smart financial choices. After all, college is an investment, and we want to be sure that you get the best-possible return.

This month we will be focusing on the topic of college—saving for college, taking out loans, maximizing student aid, and more. Be sure to follow us on LinkedIn, Instagram, and Facebook to take advantage of all the great information we will share throughout the month!

Written by Kaitlyn Keeler

Kaitlyn is an enthusiastic client service intern that assists our advisors with your accounts. She is an attentive business student with a concentration in finance.