How much will your student loans cost you?
In 2015, the average student borrower is graduating with about $35,000 worth of debt. Paid over the course of 10 or more years, the cost of repayment will include several thousand dollars more to pay off the interest that accumulates on the loan.
But that estimate is deceptive. The cost of a student loan isn't just the money that goes into repayment. It's also in all the places that the money could've gone, but didn't.
According to a 2013 report by the think tank Demos, over the course of a lifetime for a household with two average borrowers, the cost of student debt that accounts for those missed opportunities comes out to well over $200,000. Here's why:
Student debt affects your career opportunities.
The report uses consumer finance data to build a model that compares two households that are virtually identical, except one has two college-educated earners with no debt and the other has two college-educated earners who represent average student loan borrowers in 2013 dollars — $26,600 each and $53,200 total for the household. The projections assume income and assets grow and debts decrease at a constant rate over the course of a lifetime.
One striking finding is student debt has a dampening effect on income over the course of a borrower's lifetime. Other studies have shown that borrowers are initially more inclined to pursue lucrative jobs due to their student loan obligations, which would suggest that their debt would serve as an impetus to make more money than non-borrowers. But ultimately debt makes borrowers more risk-averse than people who don't have to worry about monthly payments for years on end, and their incomes grow lower than those free of debt.
"People who have taken on student debt may not be able to take advantage of certain opportunities which could lead eventually to a higher income. They have less freedom and ability to take on risk," Robbie Hiltonsmith, the author of the Demos report, told Mic.
The burden of student debt affects the calculations people make when considering career risks, whether it's moving to a bigger city to find a more ambitious job, or joining a startup that could have huge payoffs but offers little in the way of short-term job security. In the long run, playing it safe makes it more likely that you have a smaller paycheck.
Student debt drains your savings and investments.
But the biggest consequence of having to pay back student loans is the way it hampers a borrower's ability to save and invest. Because of the way that savings compound over a long period of time, the costs of delaying setting aside money for them also compounds.
Student loan debt in America could lead to a lifetime wealth loss of $4 trillion for indebted households nationwide.
"Once a borrower pays off their debt, they ramp up their retirement savings. But it's too little too late to catch up to the household that's been saving more since they got out of school," Hiltonsmith said.
Student loans hinder an individual's capacity to invest, but the gap between borrowers and non-borrowers is less about choosing to get involved earlier or later, and more about the kind of investments being made. Households with student debt put down a smaller down payment on a house, pay a higher interest rate on their mortgage (the result of having more debt) and buy less expensive homes. Home-buyers without student debt can take on larger mortgages and buy more expensive homes, or opt for larger down payments on less expensive properties, which translate to lower monthly mortgage costs and greater initial shares of home equity. In both cases, these home owners will likely also benefit more from appreciating home values than those who either own cheaper homes or have less equity in a similar home.
Over a lifetime, these things snowball. Demos estimates that compared to the baseline of a debt-free household, households composed of two average borrowers experience a net loss of $207,890 in assets:
"We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households, not even accounting for the heavy impact of defaults," according to the Demos report.
Who does this affect? Americans do not bear the burden of student debt equally. Lower-income students, African-American students and students who attend for-profit colleges (who are disproportionately low-income) face far more daunting debt prospects than most of the general population. And so it follows that they face much greater loss of wealth than other demographic groups.
In the chart below, the black bar representing those with no debt is much smaller for the bars on the left (bachelor's recipients from lower-income households) than the bars on the right (student from higher-income backgrounds):
About three quarters of bachelor's degree recipients from families with incomes of less than $60,000 graduated with some loans, while less than half of those with families making more than $100,000 did.
Those disparities aren't surprising, but they drive home a tragedy that bears repeating: Our society favors the wealthy at every turn, and their fortune begets more fortune for as far as the eye can see.