Soaring levels of student loan debt are not only burdening recent graduates but have created entire generations that aren’t able to save and invest, potentially hurting long-term economic growth.
College-educated members of Generation X, those born between 1965 and 1980, have accumulated less wealth than their parents had at the same point in their lives, according to a new study by the Pew Charitable Trusts. The Gen Xers have built up $20,000 less home equity than their parents, adjusted for inflation, and a median debt seven times higher.
That’s despite the younger generation having an adjusted median household income that is $20,000 higher, largely because more couples have two incomes today. But often both earners are paying off debt, eliminating some of the benefit of dual incomes.
“It is really the student debt that is pulling their wealth totals behind,” Pew researcher Diana Elliott said.
Though most graduates eventually pay off their debt, they are sacrificing home equity and saving. While they’re in debt, they can’t afford to make big-ticket purchases including houses and cars, are less inclined to start their own businesses, and many delay marriage and child bearing.
“The domino effect of student loan debt is real, and it is spreading. It is hard to erase this debt quickly – paying it back may take many long years and prevent people from achieving other financial milestones,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in a speech Wednesday.
According to a June study by the Brookings Institution, the average borrower took 13.4 years to pay off his loan in 2010, up from 7.5 years in 1992.
Total student debt now tops $1 trillion, notes Peter Morici, professor of economics at the University of Maryland. Just servicing that debt is taking up tens of billions, maybe $100 billion a year. Think of all the purchasing power that is being lost, he said.
“What’s more, it is really doing a lot to push down the birth rate among middle-class Americans, and that has very profound long-term consequences. For one thing, babies are the best long-term stimulus package you can have,” Morici said. “But with this kind of debt they don’t think they can have children.”
Meanwhile, the generations of graduates following the Gen Xers are piling up even more student loan debt. That suggests the scenario will repeat itself, creating a continuing drag on the economy.
The longer-term consequences are worrisome, too. Because the borrowers will accumulate less wealth over their lifetimes, their children will be at a disadvantage as well.
“We know from our work on economic mobility that wealth is often a springboard for mobility investments. … This has implications for their children. If the Gen Xers do not have money to invest in their children, then those children’s career and college aspirations won’t have the benefit,” Elliott said.
The number of households with student loan debt has risen from 11 percent in 1992 to 19 percent today, as average household debt more than doubled from $11,000 to $25,000.
The homeownership rate for people in their 20s – most first-time buyers — hasn’t recovered from the 2008 financial crisis and fell another 15 percent in the first quarter this year. That partly explains the sluggishness of the economic recovery.
“The debt loads certainly are high enough that they may play a role in, for example, making it hard for people to buy first homes, to build a downpayment,” Federal Reserve Chairwoman Janet Yellen told the Senate Budget Committee in May. “That may be an effect we’re seeing already in the housing market.”
It is also having an impact on people’s ability to retire. Some Americans’ Social Security payments are being garnished because they didn’t pay off their debt, Morici said. “You have got to remember that not everybody who takes out a student loan is 20 years old,” he noted. Some debtors are mothers re-entering the workforce or people going to graduate school after losing a job.
The average amount borrowed for undergraduate degrees rose from $15,000 for those who graduated in 1992-93 to $22,400 for those who graduated in 1999-2000 and $24,700 in 2007-08, according to the National Center for Education Statistics.
To look at one age group, the Federal Reserve Bank of New York reports that 43 percent of 25-year-olds hold student debt today, up from 25 percent a decade ago. The average amount of debt they are carrying has increased 82 percent from $11,000 to more than $20,000.
Brendan Coughlin, head of auto and education finance at Citizens Financial Group, recalled a recent incident in which a customer refinanced his student debt. He happily announced that he now could afford, not a new car or house, but new tires.
“Those are the type of anecdotes we are starting to hear from our customers,” Coughlin said.
