THE EFFECT OF OUTSTANDING STUDENT LOAN DEBT ON ASSET ACCUMULATION

BY: FRIEDI SCHESTAG, OLGA PETROVSKA & KADAR AMEK

SFSU, December 13, 2016

ORGANIZATION OF PRESENTATION

◼Quick facts about student debt and assets. ◼Literature review.◼Research question and concentration of our research. ◼Data source and description of variables. ◼Model and estimation steps.◼Results.◼Conclusion. ◼Further research.

QUICK FACTS ABOUT STUDENT DEBTIs student debt an issue? In 2012: ◼71% of all students graduating from four-year colleges had student loan debt.◼This is 1.3 million students graduating with debt in comparison with 1.1 million in 2008 and 0.9 million

in 2004. ◼66% of graduates from public colleges had student loans, 75% of graduates from private nonprofit

colleges had student debt and 88% of graduates from private for-profit colleges had student debt. ◼Average debt levels for all graduating seniors with student debt increased to $29,400 which is 25%

higher than in 2008. In 2015:◼Nationwide, about 7 in10 college seniors who graduated from public or private nonprofit colleges had

student debt. ◼Average debt amount was $30,100 which is 4% increase from the 2014 average of $28,950.

Student debt is constantly increasing, more people is borrowing money to pay for the college. Student debt is an issue. Source: The Institute For College Access & Success.

MOTIVATION TO STUDY ASSETS

◼After college we generate income, use that income to built up assets.◼Why? In order to generate more income.◼Why do we want to purchase assets? ◼Household assets is an important defining factor of economic well-being in the U.S. ◼Especially for low - moderate income families: Because in economic hardships,

such as unemployment, illness,etc. household assets can be seen as an additional source of income as well as something to fall back on.

◼Household Goals: Building up assets and avoiding excessive debt ◼ In long term: For older households (65), assets are a source of post retirement income.

LITERATURE REVIEW Elliott and Nam (2013) – the effects of student loans on net worth:◼ median 2009 net worth for households with no outstanding student loan debt is about three times

higher than for households with outstanding student loan debt.Hiltonsmith (2013) – student debt and lifetime wealth:◼ average student debt burden for a dual-headed household with bachelors’ degrees leads to a lifetime

wealth loss of nearly $208,000.Elliot and Lewis (2013) – the effects of student debt on assets:◼ median assets in 2009 for a household without outstanding student debt ($207,000) are higher than

for a household with outstanding student debt ($174,000).◼ living in a household with median assets in 2007 which has outstanding student debt is associated with

a loss of about 20% in assets compared to a household with similar levels of assets but without student debt.

Elliott, Grinstein-Weiss, Nam (2013) – the effects of outstanding student debt on assets accumulation: ◼ median assets in 2009 for a household without outstanding student debt are higher than for a

household with outstanding student debt.◼ living in a household at the 50th percentile with outstanding student debt and 2007 assets of $225,035

is associated with a loss of about 20% in 2009 assets (about $44,661) in comparison with a similar household with no student debt.

RESEARCH QUESTIONS

◼Is having outstanding student loan debt associated with assets accumulation?◼Is the amount of outstanding student loan debt associated with

assets? ◼Which type of assets gets more affected by outstanding student

loan?

◼ Lastly, evaluating the marginal effects of the coefficients at the 25th, 50th, and 75th percentiles.

DEPENDENT VARIABLES

Financial Asset (fin) Nonfinancial Asset (nfin)

Liquid Assets CDs Savings

Bonds

BondsPublicly Traded Stocks

Non-money Market Mutual Funds

Retirement Account

Cash Value Life

Insurance

Other Managed

Assets

Other Financial Assets

Vehicles Houses

Other Residential Real Estate

Net equity in

Nonresidential Real Estate

Net Equity in Privately

Held Businesses

DESCRIPTION OF BASE VARIABLES

Name Type Description Stdebt Dummy =1 if R. has outstanding student

debtstdebt Quantitative Amount of student debt

income Quantitative Amount of income in 2012

welfare Quantitative Amount received from welfare

married Dummy =1 if Married or living with spouse

race 4 Dummies White, Black, Hispanic, Asian/Other

OCCAT2 4 Dummies Occupational prestige

age Integer Age of Respondent in years

colldeg Dummy =1 if R. has college degree

SURVEY OF CONSUMER FINANCES

◼ Sponsored by the Federal Reserve Board.◼ The 2013 Survey of Consumer Finances most recent survey conducted.◼ Every 3 years.◼ Information on finances of U.S. households.◼ Data: Summary Extract Data (multiple imputation to correct for missing data).

SAMPLE CHARACTERISTICS

DATA SUMMARY STATISTICS

ESTIMATION STEPS◼Computing missing values for dependent variables: “mi impute reg” command in Stata.◼ Estimating effects of outstanding student loan debt on each type of assets using dummy

for student debt variable, OLS using ”mi estimate” command in Stata. ◼ Estimating effects of outstanding student loan debt on each type of assets using dummy

for student debt variable and age restriction (<=45/35). OLS using ”mi estimate” command in Stata.

◼ Estimating effects of outstanding student loan debt on each type of assets with age restriction (<=45/35). OLS using ”mi estimate” command in Stata.

◼ Estimating effects of outstanding student loan debt on each type of assets using student debt variable and age restriction (<=45/35). Quantile regression using ”mi estimate” command in Stata, dividing the asset distribution in 4 quartiles

MODELS

 

REGRESSION OUTPUT (FINANCIAL & NONFINANCIAL ASSET) ◼ Is there an effect between financial & nonfinancial asset and student debt? (using dummy for student debt

variable)

REGRESSION OUTPUT WITH AGE RESTRICTION <=45 – FIN ASSETS & <=35 – NONFIN ASSET

◼ Is there an effect between financial & nonfinancial asset and student debt? (using dummy for student debt variable)

REGRESSION OUTPUT (FINANCIAL & NONFINANCIAL ASSET) ◼ Is there an effect between financial & nonfinancial asset and student debt?

OLS RESULTS SUMMARY

Nonfinancial AssetsFinancial Assets ▪Yes, there is a relationship

between having outstanding student debt and financial assets.

▪Yes, there is a relationship between having outstanding student debt and financial assets, with age restriction of <=45.

▪Yes, there is an effect. On average, a 1% increase in outstanding student debt is predicted to decrease financial assets by $104,031.04 holding everything else fixed.

▪Yes, there is a relationship between having outstanding student debt and nonfinancial assets.

▪Yes, there is a relationship between having outstanding student debt and nonfinancial assets, with age restriction of <=35.

▪Yes, there is an effect. On average, a 1% increase in outstanding student debt is predicted to decrease nonfinancial assets by $129,394.56 holding everything else fixed.

QUANTILE REGRESSIONWhy are we using a quantile regression?

Comprehensive Picture Linear Regression -Partial View-

Outlier Problem Are the coefficient changing?

QUANTILE REGRESSION: OUTPUT, 0.25 QUANTILE◼ Is there an effect between financial & nonfinancial asset and student debt?

QUANTILE REGRESSION: OUTPUT, 0.5 QUANTILE◼ Is there an effect between financial & nonfinancial asset

and student debt?

QUANTILE REGRESSION: OUTPUT, 0.75 QUANTILE◼ Is there an effect between financial & nonfinancial asset and student debt?

QUANTILE REGRESSION SUMMARY

Financial Assets Nonfinancial Assets

Linear Regression Coefficient

-0.027

Q .25Coefficient

-0.023

Q.50Coefficient

-0.029

Q.75Coefficient

-0.020

Linear RegressionCoefficient

-0.04

Q .25Coefficient

-0.03

Q.50LR=QR

-0.04=-0.04Q.75

Coefficient-0.033

CONCLUSION◼ Linear Regression: Overall, a four-year college graduate with outstanding student debt will

be in bad financial health ( in terms of assets) than a four-year college graduate with no outstanding student debt, in short run.

◼ Linear Regression: Just by having student debt: Financial Assets predicted to go down by 54% and Nonfinancial Assets - down by 43%.

◼ Linear Regression: The effect of student debt on nonfinancial assets ($129,394.56) is higher than for financial assets ($104, 031.04).

◼Quantile Regression: For both components of the asset the effect is approximately the same and do not drastically differ from linear regression coefficient.

◼ It delays major life events for young professionals (House, Financial stability, Post-retirement life).

FURTHER RESEARCH

◼Use SCF 2016 and compare with previous research to determine trends. ◼Analyze and compare the same relationship by: Region;States (Each state have different average student debt);Type of school (Public and Private University).

THE END

THANK YOU!