$1 trillion student loan debt widens US wealth gap
By CAROLYN
THOMPSON
Associated
Press
Published: Thursday, Mar. 27, 2014 - 1:51 pm - The Sacramento Bee
Every month that Gregory Zbylut pays $1,300 toward his law school
loans is another month of not qualifying for a decent mortgage.
Every payment toward their student loans is $900 Dr. Nida Degesys and her
husband aren't putting in their retirement savings account.
They believe they'll eventually climb from debt and begin using their
earnings to build assets rather than fill holes. But, like the roughly 37
million others in the U.S. saddled with $1 trillion in student debt, they may
never catch up with wealthy peers who began life after college free from the
burden.
The disparity, experts say, is contributing to the widening of the gap
between rich and everyone else in the country.
"If you graduate with a B.A. or doctorate and you get the same job at the
same place, you make the same amount of money," said William Elliott III,
director of the Assets and Education Initiative at the University of Kansas.
"But that money will actually mean less to you in the sense of accumulating
assets in the long term."
Graduates who can immediately begin building equity in housing or stocks and
bonds get more time to see their investments grow, while indebted graduates
spend years paying principal and interest on loans. The standard student loan
repayment schedule is 10 years but can be much longer.
The median 2009 net worth for a household without outstanding student debt
was $117,700, nearly three times the $42,800 worth in a household with
outstanding student debt, according to a report co-written by Elliott last
November.
About 40 percent of households led by someone 35 or younger have student loan
debt, a 2012 Pew Research Center analysis of government data found.
Allen Aston is one of the lucky ones, having landed a full academic and
financial-need scholarship at Ohio State University. The 22-year-old software
engineer from Columbus estimates it let him avoid about $100,000 in debt.
Without loans to repay, Aston is already contributing 6 percent of his salary
to a retirement fund that is matched in part by his employer and doesn't have
the same financial concerns his friends do.
"I'm making the same money as them, but they have student loans they're
paying back that I don't. So, it definitely seems noticeable," he said.
At the other end of the spectrum is Zbylut, an accountant-turned-attorney in
Glendale, Calif. He's been chipping away at nearly $160,000 in student debt
since graduating in 2005 from law school at Loyola University in Chicago. Now
48, the tax attorney estimates he could have $150,000 to $200,000 in a 401(k)
had the money he's paid toward loans gone there.
"I'm sitting here in traffic. I've got a Mercedes behind me and an Audi in
front of me and I'm thinking, 'What did they do that I didn't do?'" Zbylut said
by cellphone from his Chevrolet. He's been turned down twice for the type of
mortgage he needs to buy a home big enough for himself, the fiancee he would
have married already if not for his debts and her 10-year-old son.
"I have more education and more degrees than my father, as does she than her
parents, and yet our parents are better off than we are. What's wrong with this
picture?" he said.
Student debt is the only kind of household debt that rose through the Great
Recession and now totals more than either credit card or auto loan debt,
according to the Federal Reserve Bank of New York. Both the number of borrowers
and amount borrowed ballooned by 70 percent from 2004 to 2012.
Of the nearly 20 million Americans who attend college each year, about 12
million borrow, according to the Almanac of Higher Education. Estimates show
that the average four-year graduate accumulates $26,000 to $29,000 in loans, and
some leave college with six figures worth of debt.
The increases have been driven in part by rising tuition, resulting from
reduced state funding and costlier campus facilities and amenities. Compounding
the problem has been a trend toward merit-based, rather than need-based, grants
as institutions seek to attract the higher-achieving students who will boost
their standings.
"Because there's a strong correlation in this country between things like SAT
scores or ACT scores and wealth or income, the (grant) money ends up going
disproportionately to students from wealthier families" who tend to perform
better on those tests, said Donald Heller, dean of the Michigan State University
College of Education.
Those factors, along with stagnating family incomes and declining savings,
have made student loans a much bigger part of funding higher education, Elliott
said.
Harvard Business School's Michael Norton wonders whether greater public
awareness of the widening wealth gap in the United States would hasten policy
change. Norton conducted a 2011 survey that found that people tend to think
wealth is more equally distributed than it is.
But with elected officials from President Barack Obama on down now talking
about the wealth gap as an urgent public problem, a more complete picture seems
to be emerging, he said.
"Both parties are now saying, perhaps inequality has gotten to the point
where it's not fair when people don't have a chance to rise, and we need to do
something about it," Norton said.
Targeting the soaring cost of higher education, Obama in August proposed the
most sweeping changes to the federal student aid program in decades. His plan
would link federal money to new college ratings and reward schools if they help
low-income students, keep costs low and have large numbers of students earn
degrees.
Lawmakers in Congress also are debating how to address the issue, including
proposals to allow graduates with high-interest loans to refinance at lower
rates.
The American Medical Student Association supports expanding the National
Health Services Corps, which provides loan forgiveness in exchange for service
in underserved areas.
Nida Degesys, AMSA's president, graduated in May 2013 from Northeast Ohio
Medical University with about $180,000 in loans. The amount has already swelled
with interest to about $220,000.
"There were times where this would make me stay up at night," Degesys said.
"The principal alone is a problem, but the interest is staggering."
Yet, as costly as medical school was, Degesys sees it as an investment in
herself and her career, one she thinks will pay off with a higher earning
potential.
College degrees can pay off. College graduates ages 25 to 32 working full
time earn $45,500, about $17,500 more than their peers with just a high school
diploma, according to a Pew Research Center analysis of census data.
Elliott says the country needs to re-think college financing options to bring
debt down and graduation rates up.
"We can't," he said, "let debt hinder a whole generation of people from
beginning to accumulate wealth soon after graduating college."
Thompson reported from Buffalo, N.Y.