Student Loans Long Term Affect on Wealth

We are just starting to see the impact and research associated with student loan debt over longer periods of time.  A recent study issued by Robert Hiltonsmithfrom the Demos called “At What Cost? How Student Debt Reduces Lifetime Wealth” is an interesting report on student loan debt and lifetime earnings.

As college and the education system promote the positive long term income potential of a college education, we need to look at it from another viewpoint.  Often in the college decision process, we focus on the admissions and reputation of the school.  Students and parent hear the projected higher lifetime income but minimize the actual real cost of the getting that education.  This study is a good reminder why a comprehensive financial analysis should be done before committing to a college.  It will also help people who have student debt, by preparing them for issues they may face in the future.

There were various key points identified in the study but two stood out to me.  Both points identified issues facing young adults with average student debt numbers.  Initially, the key points surprised me but after reviewing the information, it made sense from a personal financial viewpoint.

Higher college debt will increase the cost of home purchase

Having higher debt will increase a person’s lifetime borrowing cost for most financed items since you may be charged a higher interest rate.  With easy access to student loans, most borrowers are unaware of the long-term consequences of student debt.  People with higher debt will typically have a less attractive debt to income ratio.  When the finance company reviews a person’s application this ratio is an important factor in your credit score and the interest rate associated with borrowing money.  This will normally affect the financing of a home or auto purchase.  As a result this increased cost may reduce your long term wealth growth.

Higher debt may reduce higher income potential.

The penalties for student loan defaultare severe.  With this constraint many students feel limited in their career flexibility and need to take a more secure approach in their career choices. Having career flexibility normally will increase your opportunities; hence increase your income potential.  According to the study, the higher debt person may make more money initially but over a person’s career this becomes a limiting factor.

Taking a lifetime approach to a college education is important.  You need to realize that a college education is an investment in your future.  Evaluating the education, cost, future salary and the quality of life after college all need to be considered before you make your college decision.

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