How college debt is creating a wealth gap

The debate over the rising cost of a college degree just got more complicated, with new research finding graduates with debt burdens are falling behind in wealth accumulation.

College-educated adults without student debt have a typical household net worth of $64,700, or about seven times the household wealth of a college-educated adult paying off student loans, at about $8,700, according to a new analysis from the Pew Research Center.

The findings come amid concern that student debt burdens are having long-term impact on the broader economy, with the Federal Reserve Bank of New York reporting this week that Americans between 27 to 30 years old and who carry student debt are less likely to own a home than their debt-free peers. The cost of a college education has surged more than sixfold since 1985, at a time when the consumer price index has merely doubled.

"It may be the case that the burden of student debt makes it more difficult for young adults to gain financial traction in other areas of their lives," wrote Richard Fry, a senior research associate at Pew. "It may also be the case that with the rising share of young adults enrolling in college these days, economic gaps between those who borrow for college and those who do not may be widening."

Of course, that's no different than in other generations: Students who come from wealthy families -- those able to afford tuition and board -- are simply entering their adult lives on better financial footing than those who need to take out loans.

Student debt may signal a household's need to turn to the debt markets to finance other purchases, such as cars or homes. Despite equivalent household incomes for those both with and without student debt, those with student debt have a total household indebtedness of $137,100, or almost twice the indebtedness of households without student loans, Pew found.

"Specifically, student debtor households are accumulating less wealth, in part, because they tend to owe relatively large amounts of other debt as well, from car loans to credit card debt," Fry wrote.

But before parents discount the value of a college education, the study notes that the long-term benefit to a diploma is played out through higher lifetime earnings. The typical household income for college-educated adults with student debt is almost $58,000, or almost twice the roughly $32,000 in household income for people without a bachelor's degree.

That confirms recent findings from the Federal Reserve Bank of San Francisco that college degrees actually gain in value over time, and remain a good investment even with the surge in costs. By the time they retire, college graduates are on track to each earn $830,000 more than their peers with only high-school degrees, the study found.

Still, that study cautioned against over-paying for prestigious colleges, noting that there's "no definitive evidence" that pricey institutions provide better results for their grads.

With Pew's research on debt holding back wealth accumulation, that's even more reason to think hard about costs when comparing the tuition rates of different colleges.

  • Aimee Picchi

Comments

Market Data

Market News

Stock Watchlist