How Does Student Loans Affect The Economy
The impact of student loans on the economy is far-reaching and complex, with many factors at play.
The first thing to consider is that, unlike other forms of debt, student loan debt is not dischargeable in bankruptcy. This can have a negative impact on the economy because it prevents people from being able to move forward with their lives after college. It also affects them financially because they are unable to use the credit they have built up during school.
Student loans also affect the economy by increasing income inequality and slowing down economic growth. Income inequality occurs when there are large differences between high-income earners and low-income earners within an economy or country. Income inequality has been linked to lower economic growth because it reduces people’s ability to spend money on goods and services, which slows down economic growth.
How Do Student Loans Affect The Economy
Report Highlights. The effect student loan debt has on the economy is similar to that of a recession, reducing business growth and suppressing consumer spending
During the height of the pandemic, workers with college degrees were spared some of the harshest consequences. The Bureau of Labor Statistics reports that workers with a bachelor’s degree are less likely to be unemployed and earn 67% more than those with just a high school degree. Plus, college graduates live longer than those without a college degree.
While student loans can be crucial in helping Americans access these benefits, economists say that student debt is holding the economy back.
Approximately 45 million Americans collectively owe $1.7 trillion in student debt. And even though federal student loan payments have been paused since March 27, 2020, the student loan crisis is still looming. The moratorium is set to expire Oct. 1, 2021 and politicians and experts warn that millions of borrowers may be thrown into “extraordinary financial hardship” when payments resume.
CNBC Make It spoke with Nela Richardson, chief economist of human resource management firm ADP, about three of the biggest ways student debt impacts the economy.
- Generational inequality
Richardson stresses that student debt is a concern because of the way it disproportionately impacts young people today more than in previous generations.
Decades of cuts to education funding means that students pay much higher college costs than previous generations did. Over the past 10 years, college costs increased by more than 16% and student debt totals increased by 99%. Today, not only do roughly 70% of college students take out loans to pay for their education, but they take out larger volumes.
Plus, recent college graduates have entered the workforce during one of the most hostile labor markets in history for young workers. According to an analysis of BLS data by Pew Research Center, 2020 college graduates saw a bigger decrease in labor force participation than those who graduated during the Great Recession.
“Student debt falls heavily on the shoulders of young people. They have the lowest incomes and are most likely to have recently finished college,” says Richardson. “We know from our data that young people were disproportionately impacted by the pandemic. They were more likely to report a job loss, a reduction in job responsibilities or a pay cut. When you add that to student debt, that creates quite a sizable hurdle.”
The result is growing generational inequality that will have significant long-term consequences, she warns: “It’s about macro growth. We should care [about student debt] because it does affect the future of GDP growth when there’s a lack of investment among young people.”
Federal Reserve data indicates that millennials control just 5% of U.S. wealth while baby boomers control over 52%. In 1989, when baby boomers were around the same age as millennials are today, they controlled 21% of the country’s wealth.
- GDP
Student debt impacts borrowers over time by raising debt burdens, lowering credit scores and ultimately, limiting the purchasing power of those with student debt. Because young people are disproportionately burdened by student debt, they will be less able to participate in — and help grow — the economy in the long run.
“What you want is widespread opportunity for investment over time. That’s what’s good for the economy. That’s what’s good for Wall Street,” says Richardson. “If you don’t have that, then you’re looking at slower growth from the prime-aged working population — and that’s problematic.”
The Federal Reserve estimates that student debt shaves roughly 0.05% off GDP per year. While the current impact may appear relatively small, as borrowers struggle to buy homes, save for retirement and invest in the stock market, the impact may become more significant.
“All those assets that the boomers have been accumulating to feed the economy, who’s going to buy those assets? Who’s going to take over to make sure that the stock and asset markets keep going up?” asks Richardson. “Maybe boomers can leave those through inheritance to their children, but that just concentrates wealth, which gets back to the issue of inequality.”
- Delinquency
Finally, there is the concern that many borrowers are expected to default on their student loans.
Currently, about $158.5 billion worth of federally managed student loans are considered in default — and this total may increase once the pause on federal student loan payments expires. Brookings estimates that by 2023, nearly 40% of borrowers are expected to default on their student loans.
“If you have delinquencies, that lowers credit scores, and that’s problematic in terms of doing anything in the economy from getting a credit card to getting a mortgage,” says Richardson, citing ADP data that suggests student loans account for 35% of severely derogatory loan balances, more than three times the delinquency rate of mortgages.
Richardson fears that because of student loan difficulties, borrowers will be held back from generating wealth through means such as buying a home or starting a business. “When you think about how the middle class builds wealth over time, there’s two ways in the U.S.: homeownership and entrepreneurship,” she says.
While consumer spending appears to be stable for now, Richardson stresses that the student debt crisis should be addressed in order to maintain economic growth.
“If you’re very focused on the here and now and the present economic recovery, you can shrug off consumer debt,” she says. “But if you care about the future, and you think about what leads to feature growth and investment, then student debt is one thing that can block that.”
effects of student loan debt on students
Students who graduate with debt will feel the effects of their debt for years after they graduate. Beyond the stress and anxiety that large amounts of debt can cause, student loans can force people to make hard choices and delay important life events.
Here are some ways in which student loan debt can have an impact on your life:
May rush into a job to meet repayment requirements
Lowering your net worth
Delay borrower’s ability to buy a home
Delay a borrower’s ability to start a family
May impact your marriage
Potential for poor credit if payments missed
May cause people to skip out on attending college
May delay life goals
May rush into a job to meet repayment requirements
If you have student debt, that means you have to pay your loan bill every month. Depending on how much you borrowed, the bill can be considerable. This could lead many students to take on a job that pays more, or simply any job they can find, rather than waiting and finding their dream job.
According to a study published by the American Student Association, nearly 50% of graduates agree that their debts hampered their ability to further their careers.
Someone without student debt could be more choosy and take the time to find a job they truly enjoy. They’d also have the freedom to take risks in pursuit of higher salaries.
Lowering your net worth
Few students graduate from college with a huge net worth, but students who avoid student loans will at least graduate with a net worth near $0. If you graduate with student loans, it usually means having a negative net worth.
This isn’t something that will have an immediate, negative effect on you, but it can have many minor impacts that you’ll feel over time.
Low net worth means you may have trouble making large purchases because you won’t have the funds. It can also make it challenging to qualify for loans.
While a college education still tends to increase overall career earnings by a significant amount (about $1 million more than someone with no college education), it can take a long time for graduates to come out ahead compared to people who take on no debt.
Delays borrower’s ability to buy a home
One of the most common ways to buy a home is to borrow money with a mortgage. If you have student loan debt, you already have one large debt that you have to repay. It can be challenging for someone to handle both a mortgage payment and a student loan payment. Having the debt can also make it hard to qualify for a mortgage in the first place.
A study by the Federal Reserve shows the impact of student loans on homeownership rates. A 10% increase in student loan debt correlates with a 1.5% decrease in homeownership rates.
Homeownership is one of the largest builders of wealth in the United States, so delaying the purchase of a house can have a major effect on a student borrower’s ability to increase their wealth.
Delays a borrower’s ability to start a family
There’s no question that having children is expensive. On average, it costs about $233,610 to raise a child from birth to 18 years old. That comes to almost $13,000 per year per child.
If your budget is already stretched by student loan payments, adding another $1,000+ per month obligation is likely to break your budget completely. Children can also add complications and stress to a life already full of stress from dealing with debt.
This could lead many to delay starting a family until they’ve paid off their loans.
Can impact your marriage
Getting married can impact your student loans, for example, by changing your income for income-driven repayment plans. However, your debt could also affect your marriage negatively.
According to a study by SunTrust Bank, financial stress is one of the leading causes of divorce in the United States.
This could be one reason that many millennials are getting married later or passing on marriage entirely.
Poor credit if you struggle with repayment
Your credit score can have a considerable impact on your financial life. If you pay your student loan bills on time, it can help you build good credit. Missing payments, however, can significantly damage your credit.
Because many student borrowers have trouble making payments, the average credit score for someone with student loans is lower than the national average. The average person with student loans has a credit score of 656, while the average for the entire United States is 711.
This is a massive difference, and it can take years for a student borrower to rebuild their credit after missed or late payments.
Cause prospective students to avoid college out of fear of taking on debt
The prospect of taking on tens of thousands of dollars of debt can be daunting, so many students may decide to avoid college entirely to avoid taking out college loans.
If college debt was less of an issue, more people might be willing to pursue higher education, increasing their lifetime income and building a more educated workforce.
Delay life goals
Student loans can significantly delay borrowers’ ability to achieve life goals like getting married, having children, buying a home, pursuing further education, or finding an excellent job in their preferred field.
People without student debt can better achieve their financial and personal goals.