How Does Student Debt Repayment Affect Wealth?

Since the late 1990s, the mean education payment-to-income ratio, a marker for the transitory burden related to student loans, has fallen steeply while repayment terms have become longer. The overall level of student debt has dramatically increased, suggesting that the level of student debt and repayment terms may have important implications for household finances and wealth building. This study provides causal evidence on the relationship between student loan repayment via the education payment-to-income ratio and net worth. We use data from the last three survey rounds of the Survey of Consumer Finances. We find that a one percentage point increase in the payment-to-income ratio causes a decrease in net worth by 9% on average. When examining distributional impacts across net worth, the effects of increasing the education payment-to-income ratio as a share of net worth are most pronounced at the bottom of the wealth distribution. Further, increasing the education payment-to-income ratio negatively impacts non-financial asset levels by 6%. Our research indicates that lowering the education payment-to-income ratio has important implications in mitigating credit constraints and providing additional liquidity for building wealth for American households