Is Student Debt Jeopardizing the Short-Term Financial Health of U.S. Households?

By Elliott, William; Nam, IlSung | Federal Reserve Bank of St. Louis Review, September-October 2013 | Go to article overview

Is Student Debt Jeopardizing the Short-Term Financial Health of U.S. Households?


Elliott, William, Nam, IlSung, Federal Reserve Bank of St. Louis Review


In this study, the authors use the Survey of Consumer Finances to determine whether student loans are associated with household net worth. They find that median 2009 net worth ($117,700) for households with no outstanding student loan debt is nearly three times higher than for households with outstanding student loan debt ($42,800). Further, multivariate statistics indicate that households with outstanding student loan debt and a median 2007 net worth of $128,828 incur a loss of about 54 percent of net worth in 2009 compared with households with similar net worth levels but no student loan debt over the same period. The main policy implication of this study is that outstanding student debt may jeopardize the short-run financial health of households. However, this topic is complex and more research is needed before suggesting policy prescriptions. (JEL 12, 122, 124)

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Today, more households than ever before are paying off student loan debt. Fry (2012) finds that 40 percent of all households headed by individuals younger than 35 years of age have outstanding student debt. For the 2011-12 school year, about 37 percent ($70.8 billion) of all undergraduate financial aid received was from federal loans (Baum and Payea, 2012). Federal Pell grants were the next-highest source of aid at 19 percent, with institutional grants accounting for 18 percent of financial aid. According to Fry (2012), the average total household outstanding student loan debt in 2007 was $23,349 and rose to $26,683 by 2010. Further, total borrowing for college hit $113.4 billion for the 2011-12 school year, up 24 percent from 5 years earlier (Baum and Payea, 2012).

While high-income households are more likely to have student loan debt, low-income households carry the greatest student loan debt as a share of household income. According to Fry (2012), outstanding student loan debt represented 24 percent of household income for households with income less than $21,044 in 2010, (7) percent of income for households with incomes between $97,586 and $146,791, and 2 percent for households with incomes of $146,792 or higher. Fry (2012) finds similar patterns with respect to assets, which suggests that the relative burden of student debt on households may not be equally shared. Changes in federal and state policies that have favored students and their families assuming more of the burden of college costs may disproportionately affect low-income and minority students (see Elliott and Friedline, 2013). While a growing body of literature suggests these shifts affect students' decisions about higher education, this article examines the relationship between student loan debt and family finances even after college graduation.

STUDENT LOANS AND SHORT-TERM HOUSEHOLD FINANCIAL HEALTH

Generally, student debt is considered detrimental to the financial health of households and the U.S. economy only when individuals default on their student loans. According to the U.S. Department of Education (2012), the national 2-year student loan default rate was 9.1 percent in 2010 and the 3-year default rate was 13.4 percent. (1) Not surprisingly, students from higher-income households are less likely to default (Woo, 2002). We speculate that higher-income families might be able to provide students with a safety net against fluctuations in their own personal income, while lower-income families are less able to offer such support. Further, the higher the amount of debt incurred by borrowers, the more likely they are to default on their loans (Schwartz and Finnie, 2002).

However, student loan debt can damage household balance sheets even when not in default. According to Boshara (2012), household balance sheets include the quality of financial services and credit scores, savings, assets, and consumer mortgage debts. Delinquency can also damage a households overall financial health. Student loans become delinquent when payment is 60 to 120 days late. …

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