How Student-Loan Debt, or Not Having It, Shapes Lives

Without student loans, millions of Americans couldn’t afford the degrees that might smooth the road to prosperity. Yet, having student loans can also make it tougher to get far along that journey.

People who leave school without loans can have an easier time buying a home, saving for retirement or starting a business, compared with those who have student debt. One aim of President Biden’s student-debt relief plan, currently stalled by legal challenges, is to help borrowers shed debt and progress toward those goals, though critics argue the program is unfair to those who sacrificed to pay for college or pay down their debt.

Research from the Federal Reserve found that, between 2005 and 2014, there was a link between rising student debt and the reduced share of young adults who own a home. Carrying student debt is also associated with being less likely to start a small business, according to research from the Philadelphia Fed, and with being more likely to delay having children, according to researchers at Ohio State University.

Furthermore, college graduates with student debt have built up an average of about $9,000 in retirement assets by age 30—half as much as those without student debt, according to a 2018 study from the Center for Retirement Research at Boston College.

“Student debt is a new stratification system,” says Charlie Eaton, an associate professor of sociology at the University of California, Merced who studies economic disparities in higher education. “It confers a set of advantages at the end of college for people who are debt-free over people with student debt.”

Being debt-free isn’t itself a guarantee of prosperity, and even with student loans, Prof. Eaton says, “you’re probably mostly better off going to college, though that’s not true for everyone.”

It isn’t surprising that those without student debt often hit financial milestones sooner than borrowers do. Notably, these graduates say they also feel more freedom to take personal and professional risks or to pursue passions and alternate paths.

Skyler McKinley, a 30-year-old in Denver, says he wouldn’t have been able to accept his first job working for $34,000 a year if he had graduated with debt. That job, deputy director of a state agency in charge of Colorado’s then-novel regulations on recreational-marijuana sales, was instrumental in launching his career, he says.

“I graduated with so much more freedom because there were no bills that came due,” says Mr. McKinley, who now works in communications at a national consumer group. He funded his education at American University through survivors’ benefits from his late father’s job as a state judge and a merit scholarship.

Mr. McKinley says that being debt-free put him in a better position, financially and psychologically, to take out loans to buy a condo in Denver for about $300,000 in 2018 and a bar for a similar amount last year.

Owning a bar was a long-held dream, though the Oak Creek Tavern only breaks even, Mr. McKinley says. “I wouldn’t have taken that risk if I was also servicing and paying debt,” he says.

The majority of recent four-year college graduates took on at least some student debt. For the class of 2021, 46% of bachelor’s degree recipients had none, according to the College Board, a nonprofit. Among Americans with a bachelor’s degree, 64% of those who didn’t take on student debt report their financial status as “living comfortably,” while 36% of those who currently hold debt say the same, according to a Fed survey.

The median monthly student-loan bill is between $200 and $299, according to data from the Fed, and many borrowers pay significantly more. In 2021, 12% of debt holders were behind on their payments, according to Fed data, and the rate was higher for Black and Hispanic borrowers, who Prof. Eaton notes face disadvantages in the labor market and tend to come from less family wealth.

Some critics of Mr. Biden’s plan argue that student-debt relief unfairly favours some well-paid college graduates over Americans without a college degree, who might be more financially insecure. Republican Sen. Mitch McConnell has called the plan “a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.”

Whether or not a college student takes on debt comes down to family finances, academic achievement and, sometimes, chance. Those whose parents can afford to pay full tuition might also benefit into adulthood from having a financial safety net and family connections.

Rachel Romer, co-founder and chief executive of Guild Education, has seen firsthand the difference it makes to not have student loans. In what she calls an “A/B test on affordable education,” one side of her family—21 of her siblings and cousins, plus Ms. Romer—had their college tuition paid with money from a family business started by her grandfather, while the other side—20 cousins—didn’t have shared wealth to draw on.

This family history served as an inspiration for her to start Guild, a platform for employers to provide education benefits to workers that can be accessed debt-free. Ms. Romer, 34, says that having a family that could afford to put her through Stanford University gave her the financial freedom to attend business school and start her company at age 26.

Emerging from college without debt can also give some graduates the space to map out alternative paths after college.

Since Frank Teng graduated in 2013, one guiding question when he is faced with a big decision has been, “What would make for a better story?” Mr. Teng, a 31-year-old user-experience designer in Houston, received a full scholarship from Yale University after being connected with the school by QuestBridge, a nonprofit that matches colleges and low-income applicants.

With no loans, he was more comfortable putting money toward a mid-college gap year backpacking in Southeast Asia, therapy in his late 20s and a monthlong wilderness-survival training earlier this year. If he had amassed debt, he says his pursuit of a good story would have been less of a priority than paying off all his loans.