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Long-Term Economic Effects of Student Debt

Countless surveys and news stories have documented the burden student loans place on young adults’ decisions to do everything from start a business to have a baby. Yet it’s difficult for researchers to measure whether student debt actually causes adverse financial effects for individuals. For one, there’s a limited time period of data, because today’s level of borrowing is unprecedented. But it’s also a challenging research topic. The demographics of households with and without student debt are quite different, so it’s difficult for researchers to control all the related background factors to pinpoint student debt as the central driver of, say, a decision to postpone buying a home.

Still, there is a small but growing body of research on how student debt is correlated with long-term outcomes. Research from the Federal Reserve Bank of New York found college graduates are more likely to own a home, regardless of whether they have debt, than non-graduates. More recent work found a $1,000 increase in student loan debt causes a 1 to 2 percentage point drop in the homeownership rate for borrowers during their late 20s and early 30s. The researchers say their work suggests increases in student debt is an important factor in explaining declining homeownership rates, but not the only factor.

Other research focused on savings behavior finds similarly mixed effects. For example, workers with student debt were just as likely as their peers without debt to participate in workplace retirement plans, according to work published by the Center for Retirement Research at Boston College. The big difference was that those with debt put much less money into their retirement accounts — regardless of whether they carried a small or large amount of outstanding debt. The final takeaway: Graduates with student loans accumulate 50% less retirement wealth by age 30 than peers without loans.

Finally, recent work from two business professors shows how student debt is related to declining rates of entrepreneurship. The research finds individuals with student debt start fewer businesses, and when they do, the businesses are less successful.