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?