In the modern American economy, there’s a direct correlation between education and income. According to the National Center for Education Statistics, the median 25- to 34-year-old with a bachelor’s degree earned $61,600 in 2021. That’s 55% more than the $39,700 the median full-time worker of the same age earned with a high school diploma. A master’s degree tacked on 21% more for a $74,600 salary.
Even so, the high cost of college forces many student borrowers to take on debt that can condemn them to a life of financial instability despite their higher income.
“Student loan borrowers are more likely to live with parents longer, accept a lower standard of living and, in some instances, miss out on chasing their dreams,” said Laura Sterling of Georgia’s Own Credit Union, the second-largest credit union in Georgia. “Borrowers may be forced to choose careers with higher earning potential, as opposed to choosing a career based on personal fulfillment.”
Long-term consequences can be even heavier, with many borrowers delaying or missing crucial financial milestones, skimping on retirement savings and losing the opportunity to build generational wealth.
According to the Education Data Initiative, student borrowers take an average of 20 years to pay back their loans. Along the way, the average borrower pays $27,000 in interest accrued at the rounded rate of 6%. Interest accounts for up to 42% of the total cost of repayment.
The average monthly payment is $503. Presuming they graduate at 22, the average borrower makes that payment 240 times as youth dissolves into middle age, and they finally break free in their early 40s.
“A debt of this magnitude does more than pressure individuals financially,” said Leo Smigel, entrepreneur and founder of the financial and algorithmic trading site Analyzing Alpha. “It hinders financial progression, comparable to running a race weighed down while others surge forward unencumbered. Achievements such as homeownership, retirement savings or generational wealth-building become secondary to meeting monthly loan repayments.
“Furthermore, it’s not just financial decisions that get postponed but life choices, like starting a family. The impact of debt goes beyond financial figures. It’s about lost opportunities and delayed dreams.”
What’s lost to student debt can best be quantified by examining what borrowers don’t do with the money they spend their youth paying back to the bank — investing and growing it while they still have time on their side.
“The funds employed toward loan repayments could alternatively be invested into retirement funds, shares or other assets,” said Tim Schmidt, founder of IRA Investing. “From my personal journey as an investor, I can vouch for the profound influence of compound interest. Even modest contributions made early on can expand significantly over time. However, the yoke of student loan payments can cause individuals to bypass such opportunities.”
Imagine that instead of paying loans, the average 22-year-old borrower put $503 into a brokerage account every month for 20 years. Earning the same 6% interest rate the average borrower pays the bank — modest gains compared to the stock market’s historical rate of return — they would turn 42 with $229,693 banked for retirement. They would have contributed $120,720, and instead of paying $27,000 in interest, they would have earned about $108,470.
If their gains mirrored the S&P 500’s average annualized returns since 1971 with dividends reinvested — 10.51% — they’d enter middle age with $387,428, more than $266,000 of which would be from the money that their money made.
When a $503 monthly payment precludes the building of a financial cushion or an emergency fund, student borrowers often have to absorb even more debt along the way — for cars, homes, weddings, vacations and daily life.
But they also forfeit the ability to give the next generation a head start.
“The ripple effects of student debt extend far into the future,” said Dennis Shirshikov, professor of finance, economics and accounting at the City University of New York and the head of growth at Awning. “Individuals with student loans often struggle to save for retirement, putting them at risk of financial instability in their later years. This inability to save and invest early also impacts the accumulation of generational wealth, making it more challenging for these individuals to offer financial stability to their children.”
Is Higher Education Worth the Expense?
Those who can’t afford to pay for college outright face a challenging dilemma — forgo the degree and settle for what are likely to be lower-paying jobs, or assume decades’ worth of debt that threatens their retirement and cramps their lifestyle along the way.
So does the degree justify the debt? The answer, of course, is it depends.
“The argument that higher remuneration from advanced degrees typically compensates for the burden of student loans is not as black-and-white as it appears,” said Schmidt. “True, in certain cases, a degree might pave the way to a rewarding career that makes loan repayments manageable. However, this isn’t universally applicable.
“For some, the expense of their education significantly outweighs their income, and they grapple with realizing a return on their educational investment. This is a substantial issue that often gets lost in the larger discourse surrounding the worth of higher education.”
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