Special Report: The Real Cost Of Student Loans
BY MONICA HARVIN (goodcall.com) – Student loan debt now stands at more than $1.35 trillion, a figure that has nearly tripled over the past decade. With more than 43.3 million Americans holding student loan debt, according to the Federal Reserve, understanding the true cost of student loan debt has become more important than ever before.
Estimates for the average student loan debt held by each borrower vary widely. The Institute for College Access & Success estimates average student loan debt at $28,950 per student, while other experts have reported that the average figure for the class of 2016 is now along the lines of $37,172.80 per borrower.
For student borrowers, however, the cost of student loans is much higher than just the sum of principal and interest. GoodCall conducted an analysis on the true cost of student loan debt to reveal how much student loans are really affecting college graduates, from delays in homeownership and lower retirement savings to lifestyle sacrifices and lessened financial security overall.
GoodCall’s study encompasses three life areas: Homeownership, Retirement, and Lifestyle. Each section contains unique findings and insight into the real cost of student loans for borrowers.
GoodCall’s research is based on a 23-year old graduate with a bachelor’s degree who starts earning the current average starting salary of $50,651 after graduation. The analysis compares four debt scenarios:
- A graduate who has no student loan debt
- A graduate who has $12,000 in student loans
- A graduate who has $28,950 in student loans
- A graduate who has $50,000 in student loans
Before diving into the cost of student loans for college graduates, here’s what student loans look like today at the national and state levels:
See info-graphic here.
Average student loan debt costs college graduates five extra years to homeownership
GoodCall’s analysis on the cost of student loans and home-buying finds that it takes graduates with the average student loan debt of $28,950 about 5 years longer to save a 20% home down payment. These graduates have almost $50,000 less in home equity 15 years after graduation compared to debt-free graduates.
Homeownership has fallen over the past decade. However, for college graduates with student loan debt, the downward trend is even more marked, according to research by the Federal Reserve Bank of New York. Though some argue that the verdict is still out on whether student loan debt impacts the rate of homeownership among college graduates, what is clear is that after college, graduates with student debt must use part of their income to pay down loans. This means less income is available for saving compared to debt-free graduates.
It also means that graduates with student loan debt will have to save at a higher rate than their debt-free counterparts to buy a home sooner. This points to another challenge student loan borrowers face: making tough decisions over whether to pay student loans off as quickly as possible or save for big purchases like a home.
In fact, a recent Harvard study reveals the consequences for wealth building that these difficult decisions can have over the long-term, where college-educated households with student loan debt were found to have significantly less in assets, cash savings, and net wealth compared to college-educated households without student loans.
Key findings for homebuying timeline
- A 23-year-old debt-free college graduate today will be ready to buy a home with a 20% down payment in 2021 at age 28. That’s five years earlier than the 33-year-old average home buyer today.
- Graduates with $12,000 in student loan debt can expect to save until 2022 before they’re able to put a 20% down payment on a median price home.
- A 23-year-old graduate with $28,950 in student loan debt today will be saving until 2026 before she can make a 20% down payment on a home, at age 33 – the current average age for home buying.
- Graduates with $50,000 in student loans will be saving until age 36 in 2029 before they’ll have enough for a 20% home down payment.
Other key findings
- Extending repayment terms or opting for a lower down payment will end up costing graduates more in the long run. Saving more, even while repaying student loans, turns out to have a big impact on leveling how long it takes a graduate with student loan debt to save for a home compared to their debt-free peers.
- Having a higher starting salary can also significantly cut down the gap between debt-free graduates and those with student loan debt. For student loan borrowers with higher interest rates, refinancing to a lower rate can also move the homebuying timeline forward slightly.
- Graduates putting off marriage to take care of student loan debt before tying the knot will take significantly longer to save for a home than if they were married and saving together – even if both partners have higher-than average student loan debt loads.
Setbacks to home equity
Waiting longer to buy a home can mean missing out on accruing home equity, an important part of building wealth and financial security. Home equity is how much of the home’s current value is owned by the homeowner. This is calculated by taking the current market value, which typically grows year over year, and subtracting any remaining mortgage payments.
By age 38, a debt-free graduate will have already accumulated almost $140,000 in home equity. That’s over $65,000 more built up wealth for a debt-free graduate in comparison to one with $50,000 in student loans. The graph below reveals how much less in home equity dollars graduates with student loan debt will have 15 years out of college. Graduates with student loan debt will owe significantly more than they own of their more costly homes compared to debt-free peers.
Saving 5% more shaves years off the road to homeownership
There are ways to speed up the timeline to buy a home. One of the most effective ways is to save more by making lifestyle and budget adjustments. Graduates who save 20% of their income minus student loan payments can shift the homebuying timeline forward significantly.
In contrast, graduates who save less of their income minus student loan payments add on years to how long it’ll take to save for a home. The graph below shows how savings rates can help or harm how long it takes to save a 20% down payment.
How starting salary shapes the homebuying timeline
The timeline to homebuying strongly depends on a recent graduate’s starting salary as well as opportunities for salary increases. The graph below reveals how starting at a higher salary, like the 2016 average of $64,891 for engineering majors, for example, can reduce the time to homeownership. In contrast, starting at a lower salary, like the 2016 average of $34,891 for education majors or $46,585 for social science majors, can mean more years of saving for a 20% down payment.
Delaying marriage to pay off student loans & the homebuying timeline
In a recent report, Zillow found that only 40% of first-time homebuyers were married. Married graduates, each with student loan debt of $28,950 and with both partners earning similar salaries, can save a 20% down payment in half the time it would take them individually. Even when both partners are paying down higher levels of debt, like $50,000 each, the timeline for saving is reduced by three years, as the graph below reveals.
Recent research by the Rand Corporation finds that women with student loan debt are putting off getting married. When taking into consideration the gender wage gap that also impacts the ability of women to save for large assets like a home, the cost of student loan debt becomes even higher for women putting off marriage in comparison to their married counterparts.
Impact of refinancing student loan debt on homebuying timeline
Alternatively, some graduates may look for ways to free up more money to save towards a down payment. One way to do this is through refinancing student debt to lower interest rates. GoodCall’s analysis reveals that for borrowers at higher debt levels, refinancing to lower rates yields modest gains in the time it will take to save for a 20% home down payment. For borrowers with less student loan debt, however, the gains are minimal, representing a…
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