What's the Real Cost of Student Debt?


Six years ago, a major line was crossed: Americans’ total outstanding student loan debt surpassed credit card debt. And it’s only ballooned since, now equaling nearly 1.5 times credit card debt and exceeding auto loan debt, as well. (Only mortgage debt dwarfs it today.) In just one decade, America’s unpaid bill for higher education doubled from $600 billion to $1.2 trillion.

On a micro level, last year’s college grads owe an average of $35,000. And students who pursue advanced degrees often end up with even bleaker balance sheets: A quarter of all grad-degree earners borrowed at least $100,000, according to a 2014 New America Education Policy Program paper, and one in 10 borrowed more than $150,000.

What does that actually mean for someone who’s graduated in the last decade or so with sizable student debt? (And if that’s you, you’ve got plenty of company: An estimated 35 percent of college grads 34 years old or younger are carrying student loans.)

The level of impact will differ depending on how much of your income is being siphoned off to student loan payments. And while you can’t cast student debt as a monolithic problem for everyone, researchers have already observed some negative side effects among those who owe a burdensome balance.

Related: Debt Payoff Guide: What’s the Best Way to Pay Off Credit Cards, Student Loans and Medical Debt?

You’re probably not pursuing your passion. Former students with high debt burdens (defined as a debt-service-to-income ratio of 10 percent or more) are much more likely to take a job outside of their chosen field than those with less debt (50.8 percent versus 36.4 percent), according to a paper by Mark Kantrowitz, president of MK Consulting, an education research firm. (The assumption is that they take jobs that will help them pay down the debt, if the jobs in their field either aren’t available or don’t pay well.)

You’re more likely to work a second job. Kantrowitz found that those who are indebted are about 50 percent more likely to hold down more than one job (33 percent of debtors versus 23.4 percent of non-debtors).

Your credit may be affected, which could cost you more down the road. A staggering one in four borrowers are either in default or struggling to pay their student loans, according to the Consumer Financial Protection Bureau. That could hurt their credit scores and make getting car loans and mortgage far more difficult and expensive.

You’re probably missing out on investment returns. Thanks to compounding interest, your 20s and 30s are perhaps the most important decades—certainly the most lucrative—to put money aside for retirement. But it’s difficult to make a student loan payment and also make much of a contribution to an IRA or a 401(k).

Still, the consequences are severe. A study by LIMRA Secure Retirement Institute estimates that a 22-year-old who starts a job with $30,000 in student loan debt could reach retirement with $325,000 less than a debt-free friend.

You’re more likely to move back home and put off buying your own. Fewer young adults under 34 are living independently today than during the Recession, according to Pew. That means parents are spending money on adult children, rather than funding their own retirement accounts. It hurts the economy because fewer people are buying starter homes, let alone couches or new TVs and appliances. And it means student loan borrowers are missing, or postponing, an opportunity to build wealth and equity by buying their own home.

Unsurprisingly, Pew also found that Americans are waiting six years longer to get hitched than they did in 1960.

Of course, these assumptions don’t apply to everyone with student debt. It’s difficult—if not impossible—for researchers to isolate the impact of student debt on every individual’s choices. And experts like Kantrowitz point out that for borrowers who owe a balance at or below the average debt load for last year’s graduates, the impact can be much less severe.

A student with the average $35,000 balance and a 10-year term, for example, would pay about $410, which is roughly the price of a car payment—not the crippling four-figure monthly payments we sometimes hear about.

That’s not insignificant, but it’s usually manageable.

And being on the hook for payments like that may not hold borrowers back from other goals: A 2014 study by Goldman Sachs showed that consumers with about $30,000 of student debt were no less likely to buy a home than their debt-free peers, for example. (It takes at least $50,000 in debt, researchers found, to have a significant impact on homeownership.)

There are also loan-relief options like income-based repayment programs or loan forgiveness in exchange for time spent in teaching or other public service occupations that can help ease the burden on borrowers.

The tricky part is figuring out the tipping point at which student debt becomes a serious financial impediment.

Goldman Sachs researchers found that the critical dividing line forms around those who must devote more than 10 percent of their income to repaying school debt. (Of course, it’s tough to predict how much you’ll be earning after graduation when you’re applying for loans.)

Kantrowitz uses a different, back-of-the-envelope calculation to identify students who leave school with “excessive debt,” looking at factors like whether a degree pays for itself with earnings within 10 years and if a student’s starting salary exceeds the total debt burden.

By those measures, Kantrowitz estimates 27 percent graduate with “too much” debt. On the bright side, that means roughly three out of four student borrowers can reasonably repay their loans within a decade (though it may require some sacrifices).

But for the millions who can’t, that’s small consolation.