Student loans have their place in our current educational system. Many students wouldn’t be able to go to college without them, or they may be forced to work full time while going to school (untenable for some people).
It should not come as much of a surprise that the more student loans you take out, the lower your net worth will be. For most college students, having a negative net worth is no big deal since you are not expected to repay your student loans until after you graduate. The real problem lies with the expanding number of students taking these loans and the higher balances they are carrying well into adulthood.
Chart: Frank C. 60SecondStatistics
As you can see according to data from WSJ, student loans are, by far, the biggest indicator of Millennial net worth. If you have them, your net worth is probably negative, if you don’t it’s likely positive. Since college graduates earn more on average than non-college grads, along with the fact that for most public student loans the interest accumulated in school is paid for by the government, the loans themselves are a good investment for most students.
The percentage of students who feel a strong negative financial effect from their loans though is growing. With a default rate of over 11%, more than 1 out of 10 borrowers basically give up trying to pay back their loans. However, student loan lenders will get their money, even if they have to garnish your wages or tax returns for decades.
In the chart above, it takes about until age 30-31, on average, until you hit a positive net worth. That’s a problem when it comes to other forms of lending since debt obligation payments are removed from income calculations, leaving many Millennials with little discretionary income.
Total balances are quickly rising as well. Those graduating college this year can expect to hold almost $40,000 in student loans, compared to someone who graduated in 2004 holding slightly over $18,000. As I’ve discussed before, much of this is due to college raising their prices faster than they have in the past, usually much faster.
When the accountants who work for these colleges know the money is out there, all they have to do is bump up their tuition and housing costs, they’ll often do it without a second thought. Students who have to use student loans will pay sticker price while those on full scholarships from the school won’t have to pay at all, instead the school will just move their own money from one fund to another, and back if necessary.
At the end of the day, college is what you make of it. For most people, it is definitely worth the investment. Student loan interest rates are the lowest rates you will find for an unsecured loan and there is something to be said about having the college experience. Taking your first couple of years at a community college and transferring is usually the #1 way to save money with staying in-state right up there with it.