Summary

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. The model’s prediction of lifetime lost assets due to student debt also understates the impact of education debt on many borrowers in another way. Student debt levels vary widely by both race and family income of graduates; thus, for low-income and minority borrowers, the lifetime cost of student loans will likely be even greater (see the box on the following for more detail).

Before we can account for the large differences in debt burdens by race and family income, we need to establish a baseline scenario to examine the lifetime impact of student debt on assets for an average borrower, which is the focus of the model in this brief. Even when we consider this average borrower who (as explained below) saves and accumulates under somewhat ideal circumstances, the lifetime impact of student debt paints an already troubling picture.

Key Findings

Our model finds that an average student debt burden for a dual-headed household with bachelors’ degrees from 4-year universities ($53,000) leads to a lifetime wealth loss of nearly $208,000.

Nearly two-thirds of this loss ($134,000) comes from the lower retirement savings of the indebted household, while more than one-third ($70,000) comes from lower home equity.

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.

The wealth loss will be greater for households with larger-than-average levels of student debt: students from low-income families, students of color, and for-profit students.

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This publication was funded in part by the Kresge Foundation