The typical college graduate will leave campus this month owing nearly as much money as they stand to earn in their first year of full-time employment, new research shows.
At a personal level, graduates toting up their private and government student loans, credit card balances, and personal debt will find the sum shocking. On average, they owe $35,200 and half say they are surprised by how much debt they have accumulated, according to a Fidelity Investments Cost-Conscious College Graduates Study.
At a broader level, this debt has far-reaching implications for the economy as young people with starting pay of $44,455 spend much of it servicing debt—not buying cars and homes or beginning to save for retirement or emergencies. Some 70% of college grads have loans; many won’t pay them off for a decade.
The upshot is that young people are getting a late start building wealth. People in their late 20s to late 30s have 21% less inflation-adjusted wealth than those in the same age range 25 years ago, according to the Urban Institute. That’s partly due to the housing bust, which socked young people who had bought near the top. But student debt is a big factor.
“Student loans are the second largest source of debt for today’s Americans in their late-20s to late-30s,” writes Caroline Ratcliffe of the Urban Institute in her blog. “By way of comparison, student loans were a relatively small component of debt for their counterparts in the 1980s.” Mortgages remain the largest debt source.
Ratcliffe shared this view with the Federal Financial Literacy and Education Commission on May 14 as part of the Commission’s inquiry into student debt issues. She said that educating high school kids about college debt should be a priority, and added:
“But teaching financial literacy at younger ages is also critical. The earlier in life a person begins to build wealth, the more time those assets have to compound and become more valuable. So the key is to teach more people to make sound financial decisions earlier in life.”
Better-informed students would make wiser choices, the Fidelity survey concludes. Some 39% of recent grads said they would have planned differently if they had understood how much debt would pile up. Among steps they wish they had taken: saved earlier, researched financial aid more thoroughly, looked for additional ways to save and control costs while in school.
College loans total $1 trillion, and because of the drag this debt exerts on the economy the topic has never been more front and center. For most, college remains the surest ticket to a better standard of living. “Workers with post-secondary training are more likely to be employed, earn higher wages, and rise up the economic ladder,” Treasury Secretary Jacob Lew said at the FLEC meeting. “Education helps create new businesses and jobs, supports the middle class, and spurs productivity and growth.”
But mounting student debt has the opposite impact by leading college grads to take any job they can find to pay their debts, not put their career first; and to spend their income on debt service, not invest for the good of the economy and their future. As Lew said:
“These decisions-made early in life mean the difference between an individual who is prepared to enter the workforce and has put themselves on a course for success, and an individual who is so weighed down by onerous debts that it is hard for them to move forward…In today’s economy, it is also essential for Americans to develop basic financial knowledge and learn how to navigate a complex financial system.”
According to the Fidelity study, here is the advice the Class of 2013 would offer to high school students:
- Plan sooner Get involved in college planning and financing decisions with your family early, before it’s time to decide on a school.
- Understand your tab Take time to understand the financial aid process, how different kinds of loans may affect post-graduation expenses and debt, and how grants and scholarships can help offset costs.
- Consider job prospects Think about the majors offered and how they may impact career goals.
- Control costs Look for ways to save and control costs while in school and create a plan to help manage expenses.