News Column

Report Warns of Dangerous Long-Term Consequences of Student Debt

January 27, 2014


LAWRENCE, Kan. - Student debt could be a ticking economic time bomb for the fiscal health of the nation. That's the conclusion of a new report sounding a warning regarding the damaging effects that even small amounts of student debt might have. Adults with student debt tend to show lower college graduation rates, delays in marriage, delays in purchasing cars and homes, and lower net worth than those without debt, according to the report released recently by the Assets and Education Initiative (AEDI) at the University of Kansas (KU).

Some studies even find that total debt in the range of $3,000-$10,000 might produce diminishing returns for some public-university students - far less than what most Americans would consider "high debt."

The effects of these constraints compound over time. For example, households with a member carrying student debt have less than half as much saved for retirement as those without, when controlling for other factors. The burdens don't remain within families, either, as the debt constrains consumer purchasing and eventually may impact the national economy.

"Student loans today are a dangerous product sold at high doses to uninformed customers. For many middle-class students, these investments wifi pay off," said Dr. William Elliott, one of the co-authors of the report and director of AEDI. "But we need to make sure ah students, especially disadvantaged students, have options other than mortgaging their futures."

The report," Student Loans Are Widening the Wealth Gap: Time To Focus on Equity," reviews the latest research on the effects of student loans on educational and financial outcomes. College graduates without outstanding student debt have nearly three times the net worth of student borrowers, while those with student debt have 41 percent less home equity than students with no debt. The burdens of debt persist late into life: According to the Federal Reserve Bank of New York, 2.2 million student loan borrowers are over age 60, with an average debt load of $ 19,521.

The report holds up children's savings accounts (CSAs) as an asset-based alternative to student loans. Students with college savings show improved educational outcomes before college, and are more likely to enter and succeed in college. The report identifies several features that make CSAs most effective, especially for low-income families: matching contributions, automatic enrollment, and allowable withdrawals for educational expenses before college.

"Encouraging student savings wifi help us transition away from dependence on student loans," said Melinda Lewis, also a co-author of the report and policy director at AEDI. "CSAs are a bipartisan idea, and appetite for them is growing in several states. We're hoping to help these programs expand. At the federal level, we need to change when students learn about financial aid options to help them avoid debt."

"Student Loans Are Widening the Wealth Gap" contains a range of policy recommendations. In addition to expanding promising CSA programs, the report recommends making loan terms and conditions easier to understand for students, building a savings component into the federal Pell Grant program, giving students earlier notice about the financial aid for which they will qualify, and easing credit constraints for indebted graduates.

The Assets and Education Initiative is an office of the KU School of Social Welfare whose mission is to create and study innovations related to assets and economic well-being, with a focus on the relationship between children's savings and the educational outcomes of low-income and minority children as a way to achieve the American dream.

The Social Work Administration and Advocacy Practice concentration in the Master of Social Work Program at KU prepares students for administrative and advocacy practice grounded in the knowledge and values of social work.

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Source: Hispanic Outlook in Higher Education, The

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