Study: Student debt makes you poorer

(MoneyWatch) It's still a given that a college education means bigger paychecks over a person's lifetime. But as people take on ever greater amounts of student debt to fund school, the wealth they accumulate over their lifetimes is drastically less than people who didn't have to borrow.

Using data from the Federal Reserve, a new study by economist Robert Hiltonsmith at advocacy group Demos found that the average student debt for a household in which two breadwinners have bachelors' degrees from 4-year public universities is $53,000. The kicker: That debt leads to a lifetime wealth loss of nearly $208,000.

The predictions are dire, and of concern not only to people who owe on student loans, but to anyone who cares about the economy. "Student debt's financial impact won't just be felt by the nearly 39 million Americans who currently have student loans," Hiltonsmith wrote. "The drag of student loans on indebted households' purchasing power and ability to save will slow already sluggish growth for the entire U.S. economy."

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The report said that nearly two-thirds of this loss, $134,000, comes from the lower retirement savings of the indebted household, while more than one-third of it, or $70,000, comes from lower home equity. For example, the report suggested that people without student debt were able to purchase more expensive homes and use bigger down payments to buy them. That resulted in lower monthly payments, freeing up more money for savings and investments.

Hiltonsmith's research found that people with student debt tend to earn more at the outset of their careers, as higher salaries takes priority over any other consideration when weighing what jobs to take. But that trend is only temporary: As people's careers progress, he found that the salaries of people without debt overtake their indebted contemporaries.

Projecting into the future, the report predicts that the $1 trillion in outstanding student loan debt in the U.S. will lead to total lifetime wealth loss of $4 trillion for indebted households.

The gloomy findings of the report come despite the fact that Hiltonsmith said he tried to keep the assumptions underlying it as optimistic as possible. "These projections assume that income and assets grow and debts decline at a steady rate each year, which is in reality a very rosy assumption," Hiltonsmith said. "Most households lose jobs or suffer declines in income, suspend or withdraw savings, and postpone debt payments over the course of a working lifetime. However, in order to both keep the model as simple as possible and give predictions that are in reality a best-case scenario, our model simply assumes that each household's income grows at a steady, fixed rate each year, that retirement savings grow and accumulate returns at a steady pace."

The study also found that the wealth loss will be greater for households with larger-than-average levels of student debt, including students from low-income families, students of color and students who attend for-profit schools.

Hiltonsmith's recommendation? That policymakers give relief to people toiling under big student loan burdens. After all, it isn't as though the surge in student debt -- quadrupling from just $240 billion in 2003 to more than $1 trillion today -- came about by itself, or through the irresponsibility of students trying to get ahead in the world. He argues that the rise in debt has occurred primarily because government spending on higher education has plunged by a quarter in the last 10 years.

"A comprehensive solution to the student debt crisis is needed, but enacting a series of proposals that individually address the worst aspects of the trends -- reducing interest rates for future borrowers, refinancing existing student loan debt at a lower interest rate and reforming bankruptcy laws to allow for the discharge of student debt -- would together have a significant impact," he said. "And action needs to happen now, before the country's student debt burden reaches yet another terrible milestone."