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As US student debt soars to the $1 trillion mark researchers are finding that the phenomenon is having long term deleterious effects on society. Namely the increases in student debt is widening the already massive wealth gap in America.

The logic of the findings is hard to dispute – people paying out funds to service debt are at a disadvantage to those who can use that money for other things, such as investments. If two people with equivalent education and employment are compared – with one having student debt payments and one not – it should not be surprising to find that over the long term the person without the requirement to make the debt payments has been able to accumulate more wealth. While person A is paying X to service their student debt, person B can invest X in financial assets.

Those who come out of school with debt are at a strategic disadvantage to those who come out debt free.

Graduates who can immediately begin building equity in housing or stocks and bonds get more time to see their investments grow, while indebted graduates spend years paying principal and interest on loans. The standard student loan repayment schedule is 10 years but can be much longer.

The median 2009 net worth for a household without outstanding student debt was $117,700, nearly three times the $42,800 worth in a household with outstanding student debt, according to a report co-written by Elliott last November.

Note that in this instance there is no income inequality between the two people. Both have the same job and make the same amount of money, one just has the burden of student debt and one does not. Both went to school, worked to get good grades and were hired in a free labor market. The difference is the debt.

Which raises the question – why is the one in debt and not the other?

The conservative answer might be because one student was willing to work to pay for school and one was not – an attempt to ennoble the richer of the two while denigrating the poorer one as lazy. But the truth, of course is, that the wealth of the parents is generally the deciding factor.

The increases have been driven in part by rising tuition, resulting from reduced state funding and costlier campus facilities and amenities. Compounding the problem has been a trend toward merit-based, rather than need-based, grants as institutions seek to attract the higher-achieving students who will boost their standings.

“Because there’s a strong correlation in this country between things like SAT scores or ACT scores and wealth or income, the (grant) money ends up going disproportionately to students from wealthier families” who tend to perform better on those tests, said Donald Heller, dean of the Michigan State University College of Education.

Yes, if your parents have the money to pay for SAT prep courses (which can run in the thousands) you will likely do better on the multiple choice culturally skewed test. Whether you are any more knowledgeable or intelligent than your peers is another question entirely.

If we really want an educated workforce perhaps it is time to consider cracking down on tuition inflation and expanding need-based grants. Otherwise we may end up exacerbating the preexisting divisions within our society, something no educated person should want.

Image by US Department of Transportation under public domain.