By: GoodCall

Introduction

Student loan debt now stands at more than $1.35 trillion, a figure that has nearly tripled over the past decade. With more than 43.3 million Americans holding student loan debt, according to the Federal Reserve, understanding the true cost of student loan debt has become more important than ever before.

Estimates for the average student loan debt held by each borrower vary widely. The Institute for College Access & Success estimates average student loan debt at $28,950 per student, while other experts have reported that the average figure for the class of 2016 is now along the lines of $37,172.80 per borrower.

For student borrowers, however, the cost of student loans is much higher than just the sum of principal and interest. GoodCall conducted an analysis on the true cost of student loan debt to reveal how much student loans are really affecting college graduates, from delays in homeownership and lower retirement savings to lifestyle sacrifices and lessened financial security overall.

GoodCall’s study encompasses three life areas: Homeownership, Retirement, and Lifestyle. Each section contains unique findings and insight into the real cost of student loans for borrowers.

GoodCall’s research is based on a 23-year old graduate with a bachelor’s degree who starts earning the current average starting salary of $50,651[1] after graduation. The analysis compares four debt scenarios:

  • A graduate who has no student loan debt
  • A graduate who has $12,000 in student loans
  • A graduate who has $28,950[2] in student loans
  • A graduate who has $50,000 in student loans

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Before diving into the cost of student loans for college graduates, here’s what student loans look like today at the national and state levels:

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Homeownership

Average student loan debt costs college graduates five extra years to homeownership

GoodCall’s analysis on the cost of student loans and home-buying finds that it takes graduates with the average student loan debt of $28,950 about 5 years longer to save a 20% home down payment. These graduates have almost $50,000 less in home equity 15 years after graduation compared to debt-free graduates.

Homeownership has fallen over the past decade. However, for college graduates with student loan debt, the downward trend is even more marked, according to research by the Federal Reserve Bank of New York. Though some argue that the verdict is still out on whether student loan debt impacts the rate of homeownership among college graduates, what is clear is that after college, graduates with student debt must use part of their income to pay down loans. This means less income is available for saving compared to debt-free graduates.

It also means that graduates with student loan debt will have to save at a higher rate than their debt-free counterparts to buy a home sooner. This points to another challenge student loan borrowers face: making tough decisions over whether to pay student loans off as quickly as possible or save for big purchases like a home.

In fact, a recent Harvard study reveals the consequences for wealth building that these difficult decisions can have over the long-term, where college-educated households with student loan debt were found to have significantly less in assets, cash savings, and net wealth compared to college-educated households without student loans.

Key findings for homebuying timeline

  • A 23-year-old debt-free college graduate today will be ready to buy a home with a 20% down payment in 2021 at age 28. That’s five years earlier than the 33-year-old[3] average home buyer today.
  • Graduates with $12,000 in student loan debt can expect to save until 2022 before they’re able to put a 20% down payment on a median price home.
  • A 23-year-old graduate with $28,950 in student loan debt today will be saving until 2026 before she can make a 20% down payment on a home, at age 33 – the current average age for home buying.
  • Graduates with $50,000 in student loans will be saving until age 36 in 2029 before they’ll have enough for a 20% home down payment.

Other key findings

  • Extending repayment terms or opting for a lower down payment will end up costing graduates more in the long run. Saving more, even while repaying student loans, turns out to have a big impact on leveling how long it takes a graduate with student loan debt to save for a home compared to their debt-free peers.
  • Having a higher starting salary can also significantly cut down the gap between debt-free graduates and those with student loan debt. For student loan borrowers with higher interest rates, refinancing to a lower rate can also move the homebuying timeline forward slightly.
  • Graduates putting off marriage to take care of student loan debt before tying the knot will take significantly longer to save for a home than if they were married and saving together – even if both partners have higher-than average student loan debt loads.

Setbacks to home equity

Waiting longer to buy a home can mean missing out on accruing home equity, an important part of building wealth and financial security. Home equity is how much of the home’s current value is owned by the homeowner. This is calculated by taking the current market value, which typically grows year over year, and subtracting any remaining mortgage payments.

By age 38, a debt-free graduate will have already accumulated almost $140,000 in home equity[4]. That’s over $65,000 more built up wealth for a debt-free graduate in comparison to one with $50,000 in student loans. The graph below reveals how much less in home equity dollars graduates with student loan debt will have 15 years out of college. Graduates with student loan debt will owe significantly more than they own of their more costly homes compared to debt-free peers.

Saving 5% more shaves years off the road to homeownership

There are ways to speed up the timeline to buy a home. One of the most effective ways is to save more by making lifestyle and budget adjustments. Graduates who save 20% of their income minus student loan payments can shift the homebuying timeline forward significantly.

In contrast, graduates who save less of their income minus student loan payments add on years to how long it’ll take to save for a home. The graph below shows how savings rates can help or harm how long it takes to save a 20% down payment.

How starting salary shapes the homebuying timeline

The timeline to homebuying strongly depends on a recent graduate’s starting salary as well as opportunities for salary increases. The graph below reveals how starting at a higher salary, like the 2016 average of $64,891 for engineering majors[4], for example, can reduce the time to homeownership. In contrast, starting at a lower salary, like the 2016 average of $34,891 for education majors or $46,585 for social science majors, can mean more years of saving for a 20% down payment.

Delaying marriage to pay off student loans & the homebuying timeline

In a recent report, Zillow found that only 40% of first-time homebuyers were married. Married graduates, each with student loan debt of $28,950 and with both partners earning similar salaries, can save a 20% down payment in half the time it would take them individually. Even when both partners are paying down higher levels of debt, like $50,000 each, the timeline for saving is reduced by three years, as the graph below reveals.

Recent research by the Rand Corporation finds that women with student loan debt are putting off getting married. When taking into consideration the gender wage gap that also impacts the ability of women to save for large assets like a home, the cost of student loan debt becomes even higher for women putting off marriage in comparison to their married counterparts.

Impact of refinancing student loan debt on homebuying timeline

Alternatively, some graduates may look for ways to free up more money to save towards a down payment. One way to do this is through refinancing student debt to lower interest rates. GoodCall’s analysis reveals that for borrowers at higher debt levels, refinancing to lower rates yields modest gains in the time it will take to save for a 20% home down payment. For borrowers with less student loan debt, however, the gains are minimal, representing a difference of months.

For private loan student borrowers, refinancing is generally a good solution, allowing borrowers to save more and decrease the overall amount repaid over time. For federal student loans borrowers, however, it’s important to weigh costs and benefits. If you choose to refinance through a private lender to obtain a lower interest rate, it will also mean giving up federal loan benefits like access to income-driven repayment options and loan forgiveness.

Extending student loan repayment: short-term gains vs. long-term losses

Another way to free up money for savings in the short term is to extend student loan repayment terms to 20 or 25 years and/or opt for an income-driven repayment plan. However, the figure below shows how much more interest borrowers who extend repayment terms will pay. For borrowers who choose income-driven repayment plans, any portion of the loan that is forgiven at the end of the term will create additional tax obligations.

Added costs of opting for a lower down payment

Not all lenders require a 20% down payment. Putting less money down is another way to get to home ownership sooner. However, lower down payment options typically involve having to take on the added costs of mortgage insurance and potentially higher interest rates. These buyers accrue home equity more slowly and end up paying more interest over the full loan term in comparison to buyers who are able to put more down up front.

Using the homebuying timeline for debt-free graduates and graduates with $12,000, $28,950, and $50,000 in student loans discovered by GoodCall’s analysis, the graph below illustrates how much more a graduate who puts just 10% down on a home will have to pay on a monthly basis compared to buying with a 20% down payment.

Retirement

Average student loan debt costs approximately $500,000 in lost retirement savings

GoodCall’s analysis finds that having $28,950 in student loans amounts to nearly half a million dollars in lostretirement savings for college graduates, compared to a debt-free graduate. College graduates that extend their loan repayment terms to 2o or 25 years will have even less retirement savings over time.

A recent study the Center for Retirement Research at Boston College found that having the average student loan amount would cause retirement insecurity to rise by more than 5% percentage points. This level of retirement insecurity is similar in magnitude to an across-the-board cut of nearly 20% to future Social Security benefits, the study reveals.

What’s more, with the future of Social Security up for debate, saving for retirement is even more important for recent college graduates who may not be able to count on the same level of benefits as earlier generations. With many graduates choosing to save less for retirement while they pay their student loans, GoodCall’s analysis reveals that this could come at a much bigger cost than the student loans themselves, amounting to hundreds of thousands of dollars in lost retirement savings and forcing a retirement age well beyond age 65 for many debt-laden college graduates.

Key findings for retirement savings

  • Having $28,950 in student loans costs nearly the same as having $50,000 in student loans when it comes to lost retirement savings, with graduates at both student debt levels having approximately half a million dollars less in retirement savings compared to debt-free graduates.
  • Saving at a higher rate, like 10% or 20% of income, significantly narrows the gap in retirement savings between graduates with student debt and those who are debt-free.
  • Extending loan repayment terms to 20 or 25 years on larger student debt loads has a more damaging impact on retirement savings. Compared to debt-free graduates, graduates with $50,000 in student loans on a 25-year repayment plan will have close to one million dollars less in retirement savings.

By age 65, a debt-free graduate will have more than $1.4 million in retirement savings, based on savings 6% of total income and an employer 401(K) match of 3%. In comparison, a graduate with student loan debt of $50,000 can expect to have just under $908,000, a difference of more than half a million dollars. What’s even more striking is that a graduate with $28,950 will have just over $911,000 in retirement savings, a difference that also hovers around $500,000.

Choosing to save less for retirement during the first ten years of work, in order to make monthly student loan payments, can mean debts of $28,950 or $50,000 both end up costing over $500,000 from repayment to retirement.

At age 65, a graduate with the average student loan debt of $28,950 will have nearly 36% less in retirement savings compared to a debt-free graduate saving at a rate of 6% of income. However, if a graduate with the average student loan debt is able to save a higher percent of total income, for example, 20%, this narrows the gap in retirement savings to just under 11% less.

The chart below reveals how saving more or less for retirement affects the savings gaps for graduates with student loan debt of $12,000, $28,950, and $50,000 as compared to a debt-free graduate.

Having a higher interest rate on student loans also impacts retirement savings at age 65. A graduate with $12,000 in student loans with a 10.5% interest rate will have almost $77,000 less in retirement savings than a student loan borrower with the same amount of debt with a 3.5% interest rate. Compared to a student loan borrower with same debt amount at a 6.8% interest rate, the difference is still more than $42,000 less in retirement savings.

For graduates with higher debt loads, it may be tempting to extend repayment terms from 10 years to 20 or 25 years. However, doing this actually reduces retirement savings over time, as graduates are diverting resources away from retirement for more years and paying more interest over time. A graduate with $50,000 in student loan debt will have close to $870,000 less in retirement savings if he chooses a 20-year repayment term. With a 25-year repayment term, this figure is just shy of a million dollars less in retirement savings, compared to a debt-free graduate.

The graph below shows how extending repayment terms can have significant negative impact on total retirement savings, particularly for graduates holding more student loan debt.

Lifestyle

Average student loan debt costs more than a small luxury car, dozens of vacations and more than half of a child’s college savings

Having a college degree pays off in higher lifetime earnings overall, with young adults ages 25-34 holding a bachelor’s degree earning a median salary of $48,500 in 2013, according to the National Center for Education Statistics, compared $30,000 for those with just a high school diploma or GED or $37,500 for those with an associate’s degree.

However, when college degrees are paid for with student loans, the benefits of earning a higher income are less, since graduates must use part of that income to pay off their debt. This means diverting money away from savings for retirement or a down payment on a home, as well as having less disposable income for other aspects of life, from buying a car or setting aside money for their child’s college to eating out a couple nights a week, heading to a show or even taking a vacation. Unfortunately, many borrowers don’t realize what student loans will actually cost until they’re already in debt and having to make monthly payments for 10, 20 or even 25 years.

A recent report by EdAssist reveals that 58% of college graduates with student loan debt would give up buying a new car, 59% would give up a vacation, and 46% would sacrifice saving for their future in order to get rid of their student loan debt. GoodCall’s analysis reveals that, in fact, student loan borrowers do make all of these lifestyle sacrifices and more when you add up the full cost of student loan debt.

Key findings:

  • $28,950 in student loans will end up costing $39,978.78 – more than the cost of 55 dinners out for two, 24 concert tickets, 3 week-long Caribbean cruises for two, a family vacation to Disney, plus a small car.
  • Debt-free graduates will have over $73,000 to send a child off to college – or about 3 full years at a public 4-year institution. Graduates with $28,950 to $50,000 in student loans will have less than half of that – just under $32,000, or not even 1.5 years of college at today’s prices.
  • With the money used to repay the average student loan debt, graduates could have taken dozens of cruise vacations or even bought a luxury car.

The graph below paints a picture of the kind of lifestyle sacrifices student loan borrowers may be giving up in exchange to pay back student loans. To give an idea of the real cost of student loans, the average student loan borrower will repay over ten years what it would cost to buy a compact car, 55 dinners out for two, 24 concert tickets, three week-long Caribbean cruises for two, and a family vacation to Disney.

For those dreaming of expensive cars, trucks or SUVs, having student loan debt may set you back on the way to seeing this dream come true. The total cost to repay $28,950 in student loans is actually more than the average price of an entry-level luxury car, like a Mercedes-Benz C-Class for example. And, with what it costs to repay $50,000 in student loans, a graduate could buy a full-size pickup truck or luxury SUV and have money leftover.

Here’s some more food for thought: the total amount of monthly payments it would l take to repay just $12,000 in student loan debt is more than what it would cost for two people to take 13 seven-day cruises in the Caribbean. The cost of $28,950 in student loans is roughly the equivalent of 32 Caribbean cruises for two. And with what it would cost to repay $50,000 in student loans, a college graduate and a companion could take 56 week-long cruises.

It’s not only about taking vacations or buying new cars, either. College graduates with families may be sacrificing saving for their children’s education in order to pay back their student loan debt. This could lead to a situation where future generations don’t have enough college savings and may also turn to debt to finance their higher education, creating a vicious cycle. The graph below shows how much more a debt-free graduate will have saved up for their kid’s college compared to graduates with student loans, who are diverting resources away from college savings to pay back their own higher education debt.

Methodology and Notes

Methodology

Homeownership

  • Student loan repayment calculations are based on a 10-year repayment plan at an interest rate of 6.8%, unless otherwise noted for comparative purposes.
  • Age to homebuying calculations are based on a savings rate of 15% of annual income minus student loan payments, unless otherwise noted for comparative purposes.
  • Annual salaries are increased by 3% year-over-year to account for wage growth and inflation.
  • Savings totals are based on monthly deposits to high-yield savings account compounding monthly at a 1% annual interest rate.
  • Home prices start at the median US home sale price of $214,000[5] as of March 2016, and an annual price appreciation rate of 1.986%[6] is applied each year.
  • Calculations for added monthly costs of putting 10% versus 20% down on a new home are based on a mortgage interest rate of 3.5%, private mortgage insurance 6.25% per year, 1.25% property taxes per year, and 0.35% home insurance per year.

Retirement

  • Retirement savings calculations are based on a savings rate of 6% of annual income minus student loan payments, unless otherwise noted for comparative purposes.
  • Student loan payment calculations are based on a 10-year repayment plan at an interest rate of 6.8% unless otherwise noted.
  • Annual salaries are increased by 3% year-over-year to account for wage growth and inflation.
  • Retirement savings totals are based on bi-monthly contributions to a 401(k) account with a 3% employer contribution match and an annual yield of 6%, compounding bi-monthly.
  • Total retirement savings are calculated at age 65.

Lifestyle

  • Costs for a seven-day Caribbean cruise for two are based on the base price of $535 per person for double occupancy, plus 15% in taxes.
  • Average car prices are based on Kelley Blue Book December 2015 estimates.
  • Price for dinners are based on Zagat’s 2015 national average price of $39.40 per person to eat out.
  • Costs for a Disney vacation are based on 2015 Hipmunk estimates of $348.30 per night hotel stay at Disney World Resort and $1,272 in flights for a family of four, plus allowances for 7-day park tickets, gifts/souvenirs/shows/activities, and food.
  • Costs for concert tickets are based on average 2015 music tour ticket price of $78.77, according to Statista.
  • Child college savings are based on monthly contributions of 5% of total income to 529 college savings plan over 18 years, earning a conservative return of 1% annually.
  • Cost of college is based on 2015 estimate by The College Board of $24,061 per year to attend a public 4-year school, including tuition, books/supplies, room and board, transportation, and other expenses.

Notes

[1] Average starting salary for a college graduate with a bachelor’s degree was $50,651 at the end of 2015, according to NACE – http://www.naceweb.org/s11182015/starting-salary-class-2015.aspx

[2] Average student loan debt was $28,950 in a state-by-state study released in 2015 by the Institute for College Access & Success – http://ticas.org/posd/map-state-data-2015

[3] A 2015 study found that the average home buyer today is 33 years old and 60% are single, according to Zillow – http://zillow.mediaroom.com/2015-08-17-Todays-First-Time-Homebuyers-Older-More-Often-Single

[4] Home equity is calculated by subtracting the estimated remaining mortgage amount, according to Zillow, from the current home price.

[5] A study released in early 2016 shows the average starting salaries for engineering majors at $64,891, education majors at $34,891, and social sciences majors at $46,585, according to NACE – http://www.naceweb.org/s01272016/stem-grads-earn-highest-starting-salaries.aspx

[6]Zillow data shows the median home sale price in the US was $214,000 as of March 2016 – http://www.zillow.com/home-values/

[7] The Federal Housing Finance Agency (FHFA) calculated the seasonally adjusted percent change in house prices over 5 years was 9.93% in 2014, based on U.S. Census data. Allocated on a yearly basis, this would equal 1.986% annual price appreciation – http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/HPI%203Q%202014.pdf

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