College debt domino hurts retirement, entrepreneurs

A college education can be the key to getting ahead—but the price tag may also be holding student loan borrowers back.

Parents almost universally believe that college is an investment in their child's future, with 89 percent telling lender Sallie Mae they expect their child will benefit from a college education. They're not wrong. Demand for college-educated workers has been on the rise, and the college wage premium—the difference in average salaries of high school and college grads—doubled to 80 percent from 1967 to 2007, according to Georgetown University's Center on Education and the Workforce. A college grad will make an extra $1 million in earnings over a lifetime, on average.

Read MoreLooking for the next crisis? Try student debt

But for the 40 million Americans with student loan debt, the payoff can take longer to arrive, if it does at all. Almost half of former students between 18 and 40 years old surveyed by Citizens Financial Group said they might not have gone to college had they known the impact student loans would have on their life.

"[College] can be good debt, but it isn't necessarily going to be good debt," said Brad Hershbein, an economist with the W.E. Upjohn Institute for Employment Research. Coupled with other economic factors like stagnant wages and rising home prices, debt can have lingering negative effects on borrowers' lives.

—By CNBC.com's Kelli B. Grant
Posted 17 June 2015

Editor's note: This is the third in our series, "Debt by Degree." Click to read the first story, "The high cost of student debt," or the second story, "Why is college so expensive?"

For some students, debt means they don't even graduate. Six years after the 2008 cohort started college, about 55 percent had completed their degree, 15 percent were still enrolled and 30 percent had dropped out, according to the National Student Clearinghouse Research Center. Those who leave overwhelmingly cite financial reasons, think tank Public Agenda found, including the expense of tuition (31 percent) and the stress of working full time to support themselves while attending school (54 percent).

"It's the worst of all possible worlds," said Mark Schneider, a vice president at the American Institutes for Research. "They have debt and they don't have a degree." Not only does that mean no college wage premium, but often, employment that's less steady for making loan payments, he said. A 2013 National Center for Education Statistics report found noncompleters were less likely than graduates to be employed, and more likely to have high student debt burdens relative to their annual income.

Dropouts are also 4.5 times more likely than graduates to default on their loans, according to a report from AIR's Education Sector. That ripples into credit scores, making it even tougher for those consumers to secure mortgages or other credit. "You can have that overhang for a long time," Schneider said.

Call them "Generation Renter." Just 37.9 percent of 25- to 34-year-olds owned a home in 2012, versus 51.6 percent of people of that age in 1980, reports CoreLogic. Grads just entering student loan repayment are less likely than peers without debt to have a mortgage, according to TransUnion—a gap that narrows but doesn't disappear two years out.

"With a high amount of student loan debt, that might impact how much you can borrow to get a mortgage," said Anne Johnson, executive director of Generation Progress, the youth division of Center for American Progress. Or how much you can put down: Of first-time buyers having trouble saving for a down payment, 57 percent said student debt was the impediment, according to a recent National Association of Realtors survey.

But the student debt factor in homeownership is one of many factors, said Laurie Goodman, director of the Urban Institute's Housing Finance Policy Center. "There's no question there are a lot of things causing people to postpone homeownership," she said—including credit restrictions and shifting ideas about a home as a wealth-building tool. "Millennials, just in the last five years, have seen a lot of home equity wiped out."

Consumers are waiting longer and longer to get married and have kids—half of men don't marry until age 29 or later, and half of women don't marry until 27, according to the Pew Research Center. More than two-thirds of unmarried millennials told Pew they'd like to tie the knot. "Many, especially those with lower levels of income and education, lack what they deem to be a necessary prerequisite—a solid economic foundation," researchers wrote.

But research has been mixed on the student loan effect. In a 2013 American Student Assistance survey, 43 percent of the 259 grads said their debt delayed decisions to start a family, and 29 percent said they'd put off marriage. Pew data, however, found only 7 percent of young adults said student loan debt delayed them from getting married or starting a family.

College also has positive effects on marriage, overall. A 2014 report from the Bureau of Labor Statistics found college grads are more likely to be married at age 27 than those with less education—and less likely to divorce.

Fewer young adults are starting businesses: The share of entrepreneurs ages 20- to 34-years-old has dropped from 34.8 percent in 1996 to 22.7 percent in 2013, the Kaufman Foundation found. It's too early to tie the decline to rising loan balances, researchers note, but studies have found student debt tends to drive people away from low-paying fields. "It is not a leap to think that it would also push people away from risky entrepreneurial ventures," they wrote.

A 2014 study from the Federal Reserve Bank of Philadelphia found that for every one standard-deviation increase of student debt in an area, the number of very small businesses (with one to five employees) dropped 25 percent. "Many individuals who create small businesses do so using credit card debt," said study co-author Brent Ambrose, director of the Institute for Real Estate Studies at Pennsylvania State University's Smeal College of Business. Student loans can limit entrepreneurs' cash flow and capacity to take on more debt.

"It's not clear-cut that bringing on student debt would be a negative," said Ambrose—the study didn't find the same effect for bigger businesses. Research also indicates that business creation remains most common among 30- and 40-somethings.

Thanks to the magic of compounding, young savers have an advantage when it comes to racking up substantial retirement savings (and even becoming 401(k) millionaires). The problem? Student debt payments eat into available cash.

Workers younger than age 25 have the lowest retirement plan participation rates—when enrollment is voluntary, just 29 percent, and 68 percent when enrollment is automatic, according to a 2014 Vanguard report. Northern Trust found that younger workers are also more likely to maintain low savings rates and to cash out their balances when they leave a job.

Yet plenty of 20-somethings are off to a decent savings start. The typical 20-something worker has saved $16,000 for retirement, and of those saving, 28 percent are putting away more than 10 percent of their salary, according to a recent Transamerica Center for Retirement Studies survey.

Unfortunately, workers in their peak earning years are also juggling student loans. "People are having education debt later in life than they used to," said the Upjohn Institute's Hershbein. A 2014 U.S. Government Accountability Office report estimated that 18 percent of households headed by someone age 45 to 54 have student loan debt as well as 13 percent of those ages 55-plus.

More than half of adults with student loan debt are concerned they will be unable to repay. "It's very tangible," said Johnson of Generation Progress. "You can either pay your loans or you can't." Big financial goals like retirement or homeownership aren't the only ones affected: Surveys from American Student Assistance and Citizens Financial Group show many borrowers struggle with smaller expenses like bills, out-of-pocket medical expenses and daily purchases.

That contributes to borrowers' overall debt load. Young households with student debt owe an average $137,010, including mortgages, car loans, credit cards and those student loans, per a 2014 Pew Research Center study. In comparison, households without student debt owe about half of that, an average of $73,250.

The net result is that households headed by borrowers age 40 and younger tend to have less wealth overall compared with peers who don't have student debt, Pew found. Consumers with degrees but no debt have a median net worth of $64,700—more than seven times as much as borrowers' average $8,700. The gap is even wider among households that aren't college educated. Those with student debt have a median net worth of just $1,200, while those without have $10,900, more than nine times as much.