Financial Advice
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Most College Graduates Can’t Afford the "True Cost" of Student Loans

Most College Graduates Can’t Afford the "True Cost" of Student Loans

For more than a decade, the massive amount of student debt on the books has been bubbling up to crisis proportions, sparking political debate and calls for reform to head off an inevitable default catastrophe. With more than 46 million college graduates carrying nearly $1.75 trillion of student loans, the question is not "if" the bubble will burst but "when." When viewed on a macro level, the problem is easy to identify as a clear and present danger to the country’s economic well-being. However, that is only the tip of the iceberg. Hiding beneath the surface is a gathering threat with the potential to derail the lives of millions of people struggling under the weight of their loans.

The convergence of high student debt, a sluggish job market, and stagnate wages has created a perfect storm for graduates who only sought to improve their financial lives but now find themselves having to line up well behind the starting line. The latest data on how student borrowers are faring in the real world has revealed that the actual cost of student debt goes far beyond the amount of principal and interest owed. Studies now show that as little as $10,000 in student debt can threaten the long-term financial security of student debtors who find themselves playing catch up for most of their lives.

Most will never catch up to the level of financial security enjoyed by graduates without student debt. On average, it will take student debtors with just $10,000 of debt ten years longer to achieve the national median net worth. Financial goals, such as homeownership and retirement, are put on hold indefinitely while loan repayments take top priority. It can get much worse for debtors who default on their loans due to wrecked credit histories and income garnishments.

A Longer Road to Homeownership

Homeownership has been declining for over a decade, and student debtors are leading the trend. An analysis that tracks home-buying among college graduates finds that it takes college graduates carrying the average student loan debt of $29,000 five years longer to come up with a 20 percent down payment for a home. In some regions of the country, the delay can be extended well beyond five years because the increase in housing prices is outpacing the increase in wages.

Graduates postponing marriage to pay down their student loans will take much longer to save for a down payment than if they were married and saving together. However, graduates with higher starting incomes are better able to close the home-buying gap, as are those who successfully refinance high-interest rate debt to low-interest debt. Graduates who try to save more for a down payment by extending loan terms may wind up paying more in the long run.

Coming Up Short for Retirement

Carrying the average student debt load of $29,000 could cost student debtors $500,000 in retirement savings. Assuming a savings rate of 6% of total income and an employer 40(k) match of 3 percent, the average debt-free graduate will accumulate more than $1.4 million for retirement. Graduates with student debt will accumulate about $911,000. Factors such as the interest rate and the graduate’s ability to save can change the outcome. Targeting a higher savings rate throughout the loan repayment period can narrow the gap significantly, which is why it is strongly recommended that graduates do not forego saving for retirement while trying to pay down student debt. Finding a way to save between 10 and 20 percent of income can erase the gap. Refinancing debt to lower an interest rate can contribute to a higher savings rate.

Foregoing Life’s Pleasures

In years past, getting a college degree meant the possibility of higher lifetime earnings and being able to afford some of life’s little pleasures, like buying a decent car or taking an annual vacation. Even today, the median salary of a 25 to 34-year old borrower with a bachelor’s degree is close to $50,000 compared with $30,000 for high school graduates. Unfortunately for student debtors, the benefits of a higher income are less when a portion of it is used to pay down debt. Considering that the average student loan debt is more than the cost of a small luxury car or ten years’ worth of cruises, student debtors must forego those pleasures, especially if they expect to make any headway on their retirement savings.

The Burden is Heavier for Low-Income and Minority Graduates

According to the data, the financial burden of student debt weighs much heavier on low-income and students of color. Not only do they need to borrow more to fund a college education, but statistics also show they benefit less from a college degree four years out of school. The unemployment rate for black college graduates is twice that of white college graduates four years after graduation, which points to systemic inequality in both the opportunity and the outcome. As long as the growth in tuition and fees outpaces the growth in financial aid, the disparity in outcomes will continue to grow.

Low-income and minority graduates are also more likely to drop out of college, carrying smaller amounts of student debt. However, even debt as low as $5,000 can become an albatross when decent-paying jobs are out of reach. They are the ones most likely to become locked into an untenable socio-economic situation.

No Easy Solutions

Although spiraling student debt has become a hot political topic, with various proposals to reduce the burden of student debt, there don’t appear to be any solutions on the immediate horizon. Efforts to reduce the cost or terms of student loans, accelerate the time frame for loan forgiveness, and even cancel student loan debt are constantly under discussion, but they don’t have much staying power. Expanding the availability of income-based repayment plans, which is also under consideration, could make it easier for millions of student debtors to manage their debt. Still, there is no consensus in Congress for broad-based legislation to address the problem faced by millions of college graduates.

One certain thing is, as long as college tuition costs continue to rise and the only means for young people to gain the "benefits" of a college degree is through student loans, the problem will continue to grow.

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