Student Debt: Varying Impacts

Graduate Student Loan Debt2 Cs6

If you are like me and just finished college at that expensive out-of-state (or private) university, chances are the debt collectors are starting to knock on your door.

There is no hiding that student debt has become a significant financial strain on many recent college grads. Student loan debt now stands at about $1.5 trillion, a quantity larger than both consumer’s credit card debt and outstanding car loans in the U.S.

Does this mean that college grads are getting screwed over? Not necessarily. Going to college still provides a far better life-time income than stopping at high school, even when accounting for these loans. There are some important differences in income, though, based on the degree the grad has earned and the field that they are in. The impact of loans thus varies based on these variables.

A Closer Look

The average student who graduates with a bachelors degree owes $37,172 according to higher-education expert Mark Kantrowitz. Along with this, the median starting salary for these same grads is $43,000 according to the New York Fed. Looking at this typical college graduate, the ratio of their starting income to their debt is pretty poor, which paints a bleak picture for their future.

However, a better way to look at higher education is as an investment. People go to school to earn more over their lifetime, not necessarily right out of school. Therefore, looking at lifetime earnings is also an important factor to understand.

According to data collected by the Hamilton Project at the Brookings Institute, the average 4-year college grad will earn $1.19 million over the course of their career. This is roughly double that of a high school graduate. Even when accounting for money lost to repaying loans, the average college grad is still better off than the average high school grad.

This number has a wide range of variation, though. For example, someone who earns a computer engineering degree will on average makes about $2 million over their career. If they incurred the average $37,172 in debt, it would amount to 1.86% of their lifetime earnings.

This is a much smaller proportion of debt than for someone with a psychology degree, for instance, which is the 4th most popular major in the U.S. according to the National Center for Educational Statistics. These grads earn roughly $950,000 over the course of their careers. Holding the average $37,172 in debt would represent 3.9% of their lifetime earnings, double that of the computer engineering degree holder.

Going back to the short term, different majors have an even greater impact on economic well-being immediately out of college. This can be seen using the Hamilton Project’s Undergraduate Student Loan Calculator. Chemical engineering is another major that, on average, produces over $2 million in lifetime earnings. Assuming that they have the average $37,172 in debt, they will have to pay about 10.7% of their income towards their loans in their first year out of school to put them on track to be loan-free in 10 years.

For a sociology major, lifetime earnings are a little bit better than with a psychology degree, but are still below $1 million. With the same $37,172 in debt, the sociology degree holder will have to pay 22.2% of their income in their first year out of college in order to be on the 10-year repayment track.

These higher short term burdens can cause some important investments, like home ownership, to be pushed off further into life.

Some Visible Consequences

A significant area of the economy that is being affected by ballooning student debt is housing. According to Fed research, home ownership for people between the ages of 24 and 32 fell from 45% to 36% between 2005 and 2014. This coincided with the average debt burden growing by 70% between 2005 and 2015.

Even though home ownership is declining in this age group, it is declining at a slower rate than student debt is increasing. Where might this come from? The differentials in earnings based on what degree you earn may help explain it. The high-earning chemical engineering majors are likely the ones who are still able to afford a home only a few years out of college. Those sociology degree holders and their lower earning counterparts are likely the ones pushing off home ownership due to the high percentage of their income going towards their loans.

Holding off on buying a home can have a significant economic consequence down the road. If someone pushes off buying a home by ten years in order to pay down student debt, they will start paying into a mortgage later in life. This puts people at risk of still having a mortgage when they get to 65 and start thinking about retirement. At this point, these people will either have to push off retirement or run the risk of having higher debt while relying on social security and retirement savings.

Putting off a home purchase can also eat into your potential lifetime time wealth. Buying land is comparable to an expensive investment. You retain the value of all those payments you make towards your mortgage, since real estate grows in value over time.

If you cannot afford a down payment on a home due to a high student loan burden, you end up spending more money on rent payments that are simply just a monthly bill, not a payment into an investment. This leads to less wealth in the long run and provides a worse economic outlook. An earlier home purchase equals more money towards your net worth, and less wasted on rent payments.

Based on these observations, the most significant consequence of the debt burden appears to be in the short run, and appears to fall on lower-earning degree holders more heavily. The biggest concern going forward is what people are putting their money into. Some of the most popular 4-year programs are the ones causing the largest debt burdens right out of school. For a psych major on a 10-year repayment plant, 23.7% of their income right out of college needs to be put towards loans. For health care administration, another top 5 major, the number is 26.7%.

Graduating From College Is Still Worth It, Just to Varying Degrees

Even with the impact on housing, the overall economy has not been drastically impacted by the amassing of student debt, at least so far.

According to Fed research, although consumption may vary graduate to graduate, aggregate consumption in the economy has only been reduced by a small amount even with the surge in debt. In other words, consumers still have disposable income even with higher debt payments.

This likely comes from the fact that 4-year college grads still earn far more than non-grads. Even people who graduate with lower-earning degrees earn more than less educated individuals.  According to the Hamilton Project, all 80 of the majors they studied led to higher life time earning when compared to graduates of high school alone, and 76 of the 80 earned equal or higher incomes than associate degree holders. This was even true once student debt was accounted for.

College, hands down, is still a worthy investment over the course of your life. Growing debt burdens in both the short and long term, however, are starting to cause some issues in the economy. Moving forward, people should be aware of the cost of debt, and do their research on their possible future income to make sure they are getting the most out of their investment.



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