Tapped Out: The Impact of Student Debt. How Student Loan Borrowers Are Coping with Debt Burdens

Transcription

1 Tapped Out: The Impact of Student Debt How Student Loan Borrowers Are Coping with Debt Burdens

2 Contents Executive Summary 3 Introduction 4 Profile of Student Loan Borrowers 5 Student Debt s Impact on Borrowing 15 Conclusion 17 Survey Methodology 17 About 19 2

3 Executive Summary Access to loans for education has enabled a generation of students to achieve a higher level of education than any generation before. Yet those same loans have stifled that generation s perceived ability to move forward in life. the ways that servicing student debt has held back many borrowers from moving forward with other life events, especially as they cope with a subpar job market. In this study, Raddon explores the demographics of our nation s student debt holders. We look at generational spread, type of degree sought, and student debt s impact on credit and borrowing. We also explore Read on to learn how financial institutions can begin serving as partners to these consumers, helping them navigate their existing debt and establish a plan to build wealth through budgeting and saving. 3

4 Tapped Out: The Impact of Student Debt In August 2016, we launched our new Raddon Research Insights program with a study entitled Has the American Dream for Millennials Been Shattered? We revisited the topic in 2017, noting the upward mobility of millennials as well as their saving (or lack of saving) habits. A single concept underlies all of these explorations: the fact that real price growth has dwarfed real wage growth for the past 40 years, making being a 20-something far more expensive now than it was in the 1970s. Publication Date: March One key component of the financial hardship Millennials face is, ironically, their high rate of college and university attendance. 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 percent of Gen Xers at the same time in their lives, 26 percent of Boomers, and 16 percent of Traditionalists. 1 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. Figure 1: Increase in median household income and the price of a four-year college education 1,400 1,200 1, Cost of College Index Median Household Income Index * Index of median income and average cost of four-year college, including room and board (1975 = 100) Sources: US Census Bureau, National Center for Educational Statistics 4 1

5 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%. While there is much debate about what has driven this rise in costs, these increases do exist and have been borne by students, primarily in the form of student loans. Profile of Student Loan Borrowers First off, student loans are not a niche product, impacting only a few people. A full 17 percent of American households have a student loan, including 40 percent of Millennials. Of those who have a student loan, 81 percent used it for their own education, 13 percent used it for a spouse s education, and another 10 percent used it for a child s. This last group represents nearly half of all Baby Boomer and Traditionalist borrowers. As part of our benchmark research, we sought to understand the impact that student loans are having on consumers finances. Figure 2: Percent of households with a student loan 45% 40% 40% 35% 30% 25% 20% 15% 17% 20% 10% 5% 0% All Households Millennials Generation X Baby Boomers Traditionalists 4% 1% Source: Raddon Research Insights 5