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Student Loan Debt Slows Economic Recovery

Michael Lux Blog, News, Student Loans 9 Comments

Ask anyone who is sitting on a large pile of student loan debt, and they will tell you it slows down major purchases as well as their spending.  Today the Wall Street Journal published an article quantifying the damage that student loans are doing to our economy.

Among the more interesting statistics:

  • Undergraduate borrowers who graduated in 2012 owed an average of $29,400 in student loan debt.
  • The $29,400 is up 25% from just four years earlier.
  • Nearly 12% of all student loan debt is in default (and that number includes students who are still in school… meaning it will rise)
  • The New York Fed estimates that 1 in 5 student loans that are actually due are in default

Despite these disturbing statistics, the author then concludes that the student loans won’t have the serious effects of the mortgage crisis because Americans owed $10 trillion in mortgage debt compared to $1 in student loan debt.

Even if the potential damage to the economy were limited to the fractional value of the mortgage debt, a crisis 1/10 the size of the mortgage crisis is still a huge deal.  Let’s not forget that the mortgage crisis led to a worldwide economic recession. 10% of that problem is still a major problem.

It’s also important to remember that if your student loans are in default, you can’t buy a home.  If you don’t have a high enough income relative to your debt, you cannot buy a home.  For many Americans, student loans prevent them from buying a home.

Recent college grads used to make up a sizable portion of new home buyers.  Student loans are eliminating much of this group from the market.

The fact that the Wall Street Journal is still discussing student loans is a positive sign.  The more people who become aware of the issues they present, the higher the likelihood these problems will be addressed.

The bad news: the issues facing student loan borrowers are still framed as a problem of recent grads, not the country as a hole.  If the sub-prime mortgage crisis taught us anything, it is that when a large enough portion of the country gets into financial trouble, it affects everyone.  Until the media, Congress, and the American decide that student loans are a major problem, the current system will remain as is.

Further Reading: The Solution to the Student Debt Crisis

Readers: What do you think when you see articles like this in the news?

  • Holly Johnson

    Unfortunately, millenials are getting hit with the double whammy of Obamacare as well, where they are expected to pay double or triple what they were in the past. That won’t help either.

  • I think there are a lot of folks paralyzed by too much debt and not enough value in return for the student loans. Moms and Dads having to work to pay loans instead of staying home with kids. Adult kids living at home because they can’t afford rent and student loan payments. Etc. In that regard I think there’s some effect. Not sure how to quantify it though.

    • That is a great point. There really is no way to quantify the expense of student loans on our society.

  • Done by Forty

    I’m still a believer that student loan debt is some of the best use of leverage there is. Avoiding or minimizing it is great if your parents and you saved for college, of course. But the increased earning potential from a college degree outweighs the negative impacts of the debt (presuming a typical career length — if you are planning on retiring at 32, skip school and the loans).

    • 20 years ago I would totally agree with you. Today, while college can be a smart decision, it isn’t always. Its not at all uncommon for people to spend close to 100k on a degree that does not give them an edge in the marketplace immediately or in the long term.

    • Done by Forty

      I agree there are probably many examples of students who are deep in debt with a degree that does not provide an edge. It’s not always a smart choice. But in the aggregate, a bachelor’s degree provides a better ROI today than it did in decades past. The income gap between the college educated and those without degrees is widening, not closing. A degree is much more valuable today than it was 20, 30, or 40 years ago.

    • Well said. There is definitely value to a college degree. I certainly can’t dispute that. However, I still believe that some degrees are not worth the cost of attaining them. Field of study makes a huge difference in the value of the degree. If you are getting a degree that may only raise your income by 5k on a yearly basis, it isn’t worth spending 100k to get it. I think people should look at the numbers for their specific program when making ROI decisions.

  • I would believe it, but I can’t say I put all of the blame on student loans. I might say that the high cost of college coupled with the staggering student loan debt they create is slowing economic recovery.

    If college cost in the US what it did is some other parts of the world, we wouldn’t have this problem

    • Very good point. Our student loan problem is directly attached to the raising cost of college. In order to fix student loans, the cost of college needs to be addressed.