$1 trillion student loan debt widens U.S. wealth gap

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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."
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