July 15, 2013

Forever in Student Debt?

SAN DIEGO (MainStreet)—Massive student loan debt is having a profound impact on twenty- and thirty-somethings, including delaying the ability among both generations to build any wealth and causing anxiety among borrowers of all income levels about whether the loans can be repaid.

"Concern about the ability to repay student debt is pervasive, and this early debt can have rippling effects over a life course, " says Signe-Mary McKernan, one of two authors of a new report from the Urban Institute called "Forever in Your Debt: Who has Student Loan Debt, and Who's Worried?"

"This is a tipping point moment," McKernan says. "People under 40 may end up so far behind, that it may be impossible to catch up."

In 1989, student loans were a relatively small component of the debt held by 29- to 37-year-olds. But by 2010, student loans were second only to mortgage debt, according to the new report.

The report also notes that one in five adults age 20 and older have student loan debt, and more than half of them worry they may be unable to repay their obligations.

Outstanding student loan balances in the United States total roughly $1 trillion. On average, recent college graduates owe about $27,000, the report states.

And the profile of the typical debt holder is anything but typical. It's a varied group that includes young and old, white and non-white, men and women, low-income and high-income, according to the report.

The drastic change in student debt levels between 1989 and 2010 can be attributed to several factors, McKernan says.

"Tuition is increasing over this time period, and more people are going to school and getting higher degrees," McKernan explains. "The other thing is, those going to school are taking on a greater amount of debt."

Another large part of the problem is people not finishing their degrees, McKernan says.

"People take student loans to get a bachelor's degree and then don't complete that degree," she says. "They don't earn the credential. And that number goes up for African Americans and Hispanics. The degree is going to pay off, on average, if you can complete it."

Meanwhile, income level appears to provide little relief from enormous school debt and the associated anxiety being felt by Generation X and Generation Y.

Student loan debt is held by adults across the income spectrum, with percentages of people holding debt varying little. For example, according to the report, 20% of people with annual incomes below $25,000 have student loan debt, as do 18% of people with annual incomes of more than $100,000.

So what can be done to help this generation establish wealth, amid such overwhelming student loan burdens?

McKernan says there are both personal and federal fixes to the problem that could help the two generations.

On the personal level, she recommends trying some of the following:

Establish an automatic savings vehicle. This involves setting up an automatic deposit into a savings account each pay period. Even as little as 2% of your pay is helpful.
Save part of your tax refund at tax time.
Get involved in an employer-sponsored retirement account.

On the federal level, McKernan says, tax policy needs to be changed, to help twenty- and thirty-somethings, low-income households, African Americans and Hispanics.

"Federal policy should focus more attention on wealth building among young households and among African Americans or Hispanics," McKernan explains. "This could be done by mortgage interest deductions, preferential tax treatment of retirement savings...But because these subsidies go through tax code...this skewed subsidy distribution doesn't benefit African Americans or Hispanics. It exacerbates disparity in wealth holdings, whether by age or by race."

But despite the high cost of higher education and the enormous challenges of repayment now plaguing countless Americans, McKernan stresses that a college degree is still a wise investment.

"It's really hard to be out there in today's economy without a good degree," she says. "But looking at these things – people should consider 'What is the likelihood I am going to complete this degree?' Education is very important. You need it in today's economy – but think about this as an investment and decide – 'Can I complete this degree?' And 'What are going to be my earnings?' "

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