Got debt? Then you're probably going to have less wealth later in life than your debt-free contemporaries, especially if that debt is a student loan.
That's the conclusion drawn by a study released on May 23, written by Min Zhan, professor of social work at the Urbana-Champaign Campus of the University of Illinois; William Elliot, director of the Center on Assets, Education and Inclusion at the University of Kansas; and Illinois Ph.D. candidate Xialong Xiang.
The report, which will be published in Children and Youth Services Review, examines four markers of wealth accumulation: total net worth, or a person's assets minus liabilities; the value of financial assets including bank accounts, retirement plans or pensions plus stocks, bonds and mutual funds; the value of non-financial assets such as real estate and vehicles; and the total market value of each person's primary housing.
The report comprised more than 1,207 people, including 626 with student loan debt and 581 of their counterparts who did not have outstanding education loans when they left college. All of the participants were born between 1980 and 1984.
"After controlling for various student characteristics and parental income, we found that having student loan debt when people graduated or dropped out of college compromised their ability to accumulate wealth afterward," said Zhan.
The study included a cohort that is often overlooked: drop-outs who leave school with unpaid loans that frequently go into default. 45% of those sampled left school without their degrees. 39% got a B.A., 11% received an associate degree, and 5% got graduate degrees.
The report found that the average net worth of people who had student loan debt after graduating or dropping out of college was $13,680 lower than that of their counterparts with no debt. Zhan said that people with outstanding education loans when they left college also had $39,630 less in financial assets and $12,670 less in non-financial assets. Parental economic status and having health insurance coverage as a young adult were important predictors of wealth accumulation, the researchers found.
"Our findings suggest that in addition to negatively impacting young people in the short term, education loans may also compromise their financial well-being over the longer term," Zhan said. "Both large and small amounts of education debt act as a barrier to future wealth building."
The study also linked post-college student loan debt with lower home values. Roughly 39% of respondents were homeowners by age 30. However, the average home value of people with post-college student loan debt was $103,000 less than that of their counterparts, the researchers found.
Student loan debt also may be exacerbating wealth inequality between black and white young adults, the researchers suggested. Black young adults were more likely to have education loans after college, and their debt-to-income ratios and loan-to-financial assets ratios were much greater than those of their white counterparts, according to the study.
Nevertheless, the report's authors agreed that a college degree is still a worthwhile investment.
"Values on all four measures of wealth were higher for people who had a bachelor's degree, and the differences persisted even when we controlled for student loan debt and other factors," Zhan said. "A college degree is still very important in building wealth for young adults, although carrying student loan debt after college graduation can reduce the payoff."