Student Debt Really Is Hurting Your Bottom Line
Eighteen months ago, we launched our new Raddon Research Insights program with a study entitled “Has the American Dream for Millennials Been Shattered?”
While some might like to chalk Millennial complaints up to laziness or unachievable perfectionism, the reality is that real price growth has dwarfed real wage growth for the past forty years, making being a twenty-something far more expensive than it was in the 1970s.
We have revisited the concept every now and again. Beyond escalating housing and health care costs, college costs have skyrocketed, and the corresponding debt has hit Millennials harder than any previous generation.
Most of what I’m about to write comes from our recent study “Tapped Out: the Impact of Student Debt”. That’s absolutely worth reading in full, but in the meantime, here’s the gist.
Millennials are the most educated generation in American history. According to Pew Research, among those 25- to 29-year-olds who were employed in 2016, 40 percent had a bachelor’s degree, compared to 32% of Gen Xers at the same time in their lives, 26% of Boomers and 16% of Traditionalists. But the cost of those degrees has risen astronomically.
To show one example of the increasing cost of higher education, consider the following chart, showing the increase in the median household income since the Baby Boomers were in school and the increase of the price of a four-year college education, including tuition, room, board, and fees. In 1975, a year of four-year college cost $2,187; while the median household income in the United States was $11,800. So a year of college would cost approximately 19% of the median salary.
By 2016, the median household income had increased to $59,039, a five-fold improvement, thanks largely to inflation. In the same period of time, the college of education had increased to $26,132, nearly 12 times higher. The ratio of college costs to income has grown from 19% to 44%.
With this rising cost comes increased borrowing to pay for it. 17% of American households have a student loan, including 40% of Millennials. Note that dramatic difference between Millennial loan usage and that of other generations.
We would expect that Baby Boomers would have paid off their college debt by now, but consider that Millennials are 54% more likely to have graduated college than Baby Boomers. Ultimately, Millennials are experiencing debt that few of their elders have faced, since so many Boomers either did not attend school or did not need to borrow, as the costs were much lower.
Ultimately, this increased debt is impacting these borrowers’ livelihoods. 18% of student loan borrowers say that they have been turned down for a loan; while 35% have avoided applying for a loan as a result of their student loan debt.
For financial institutions which lend to consumers, this avoidance represents a prime threat to loan volume, as these student loan borrowers are demographically those most likely to borrow. With over a third are choosing not to take on additional debt, that reluctance is a key component in the depressed loan demand we have seen since the recession.
The impact on borrowing is only a piece of the puzzle. Altogether 52% of student loan borrowers suggest that those loans are hampering their ability to move forward in life. For the most part, when student loan borrowers are postponing life events, they are choosing to postpone wealth accumulation: 40% have postponed saving for retirement, while 34% have put off investing. 36% have put off a vacation due to constrained cash flow.
Access to loans for education has enabled a generation of students to achieve a higher level of education than any previous generation, yet those loans have served to stifle that generation’s perceived ability to move forward in life. Financial institutions looking for lending opportunity can help these borrowers navigate through existing debt and feel more comfortable about future debt. Most importantly, a financial institution can serve as a partner to help them establish a plan to build wealth through budgeting and saving, so that they can partake of those life events they have postponed so far.