Paying off student loans is a fact of life for a growing number of American households. So it’s important to understand how student debt matters in borrowers’ financial lives. But even with new analyses, like two released on Wednesday, that role is difficult to define.
The two reports, by the Pew Research Center and the American Enterprise Institute, each examine the relationship between student-loan debt and financial well-being. Both use data from the Federal Reserve Board’s Survey of Consumer Finances, the most recent of which is from 2010. Pew focuses on net worth and AEI on financial hardship.
But research on student debt runs into a limitation: People with and without student-loan debt differ in other ways, too.
“We don’t randomly select people to take out student loans,” said Nick Hillman, an assistant professor of educational leadership and policy analysis at the University of Wisconsin at Madison. Determining a causal relationship between student loans and other life circumstances, therefore, is a challenge.
It is clear that someone repaying student loans has less money for other purposes than does an identical person without the loans. But whenever student-loan borrowers are compared to people without debt, there’s a crucial question. “What is the counterfactual?,” said Susan M. Dynarski, a professor of public policy, education, and economics at the University of Michigan at Ann Arbor.
That is, is the borrower’s alternative getting a degree debt-free, or not going to college at all? The way the country is paying for college now, the second is probably more likely.
Earnings and Net Worth
People without student-loan debt are a very diverse crowd, comprising those without college degrees as well as those who earned them but either didn’t borrow or have paid off their loans, said Richard Fry, a senior economist at Pew and author of its report, titled “Young Adults, Student Debt, and Economic Well-Being.”
Looking at households headed by someone younger than 40, Pew’s report splits them into two groups: those with heads of household who have at least a bachelor’s degree and those where the heads lack one.
The median incomes of households within each group barely differed, whether or not they carried student loans. The college-educated households had a median income of $57,941, with or without student loans. Non-college-educated households had a median income of $32,528 with student debt and $31,512 without it. The college graduates’ higher earnings, Mr. Fry said, are one more reminder that college tends to pay off.
Still, the breakdowns are rough, lumping together people with certificates or associate degrees, for example, and those with no postsecondary education at all. The analysis also combines heads of household with only bachelor’s degrees and those with, say, M.B.A.’s or Ph.D.’s. (The Federal Reserve’s sample is too small to do a finer cut on educational attainment.)
When it comes to net worth, however, the picture is quite different. Households headed by a young college graduate in which no one has student loans have a median net worth of $64,700. Among comparable graduate-led households with student debt, the median net worth is $8,700.
It’s not surprising that student loans correlate with lower net worth—after all, they count against it—but still, the difference in wealth is striking. And although student loans play a role, they are not the whole story.
Households with student loans are more likely to hold other kinds of debt, the Pew analysis found. “I don’t know if the student debt is causing the greater indebtedness,” said Mr. Fry, “or if it’s simply associated with it.”
It’s possible, he said, that having to repay student loans leads families to take on additional debt to finance their lifestyle. Another explanation: The mix of who is going to college has broadened, and now includes more people who are likely to carry other debt in the first place.
The broadening-population theory makes a lot of sense, said Ms. Dynarski, who had not yet seen the report. While college graduates earn similar incomes, wealth by definition is built up over time. Students from families with accumulated assets have a better shot at making it through college debt-free. And their families may continue to help them build up their nest eggs after graduation.
Financial Distress
The relationship between student loans and financial hardship is the central question in the other report, titled “How Much Is Too Much? Evidence on Financial Well-Being and Student-Loan Debt,” by the American Enterprise Institute’s Center on Higher Education Reform. Using late payments on any obligations as a measure of financial distress, it finds no strong correlation between levels of student debt and financial hardship.
“More debt, all else equal, would lead to higher financial distress,” said Beth Akers, a fellow in the Brown Center on Education Policy at the Brookings Institution and the author of the report. “But all else is not equal.”
It’s clear, in other words, that not everyone with high debt experiences financial hardship, Ms. Akers said. In fact, higher student debt is often offset by higher earnings. There may well be borrowers struggling to repay large loans, she said, but having a high debt burden and overborrowing are different things.
Like many available data sets, the Survey of Consumer Finances provides just a snapshot of people’s situations. That makes it harder to understand the implications of student debt, Ms. Akers said.
Researchers would like longitudinal data, to examine how borrowers fare financially during the entire time they’re in repayment, she said. That wouldn’t answer all of the questions about how student loans affect borrowers’ lives. But it would be a step in the right direction.
