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March 6, 2017

The Economic Impact of Student Debt on the U.S.

The student loan debt crisis has been compared to a ticking time bomb for the U.S. economy. Since the 2007-2008 recession, student loan default rates and overall national debt has been big news. Although politicians across the political spectrum, including former President Obama, have proposed various solutions to bring the debt level down, nothing new has hit student loans in recent years, at least since the introduction of additional income-driven repayment plans for federal borrowers. This is bad news, both for student borrowers and for the U.S. economy in general. Because as it turns out, carrying this much student debt takes a toll on other areas such as housing, retirement, and even discretionary household spending.

Good News

First, a little good news. Although the overall rate of student loan debt continues to climb, the rates at which student loans have defaulted have steadily tapered off and fallen in recent years. This is usually attributed to greater borrower awareness of federal income-contingent repayment plans. By limiting a borrower’s monthly student loan payment to 10 or 15% of their discretionary household income, these plans have helped many borrowers who previously defaulted on plans they couldn’t afford get current again. That said, college costs continue to climb and so does associated borrowing. Every year, more high school students matriculate and set their sights on college. Most of those students will need to borrow tens of thousands of dollars in order to obtain a four-year degree. For those who wish to continue with a masters, doctorate, or professional school such as the study of medicine or law, it isn’t uncommon to eventually accumulate more than $100,000 in student loan debt. These days, about 44 million people in the U.S. are carrying at least some student loan debt, and approximately 70% of students graduating with a four-year degree paid part or all of their educational expenses using student loans.

Economic Inequality

Many economists believe that the student loan problem is preventing Americans, and in particular millennials, from participating fully in the economy. This means that when student loan debt cripples individual households’ spending power, it has ripple effects on the economy as a whole. It turns out that how Americans finance their college education has critical economic outcomes for everyone in the country. High student loan debt levels perpetuate economic inequality, particularly because it is often the students in the poorest economic classes that must borrow the most for secondary education. When their parents don’t have money saved for tuition or the means to support their adult children during college, students must borrow more to cover both tuition and costs of living. Even among students who work part-time during school, it is rarely enough to avoid student loans as a necessity. This undercuts the social mobility that has long been promised by college.


Consider how a struggling student loan borrower, even one who has successfully graduated and found work, might approach homeownership. Owning a home used to be considered a young adult’s rite of passage and a sound financial investment. However, rates of homeownership have plunged among Americans under age 35. When applying for a home loan, mortgage lenders look at all of the debt obligations of an applicant, including their debt-to-income ratio or DTI (the amount of money each month that goes to debt payments versus what comes in as income) and their overall debt balances. Student loan payments count against DTI, making it harder to make those monthly mortgage payments. Balances on student loans also count against a borrower, even if monthly payments are kept low on an income-driven repayment plan. This can lead to young adults who either reduce the amount of home they buy or decide to forestall homeownership for several more years – or in some cases, permanently. Not to mention that simply making a monthly student loan payment, especially when not on an income-driven repayment plan, makes it that much harder for potential mortgagors to save the necessary money for a down payment.

Starting a Family

Also considered the province of young adults, and traditionally going hand-in-hand with first time homeownership, is starting a family. The median age for starting a family has risen for both genders. Currently, age 26 is the median age for a young woman to give birth for the first time. Although it would not be fair to place responsibility for later in life families entirely upon student loan debt, it is arguably a factor. Much like homeownership, but even more so, starting a family is a financial commitment that hefty student loan debt can interfere with. Many millennials and young college graduates are taking the approach that they would rather pay off student loans while they are young and childless, thus free to work longer and harder hours at work. Becoming a parent means juggling increased financial responsibilities such as baby supplies and daycare. These can be difficult costs to bear when also trying to pay off student debt.

Starting a Business

Across age groups but especially for millennials, entrepreneurship is stifled due to concerns about student loan repayment. More student loan debt means fewer young graduates willing to take financial risks in starting a new business. And new businesses are an important growth factor for the economy. About 25 percent of college graduates with high student loan balances say that they would like to open a new business but are delayed by wanting to pay down student loans before taking on the type of new debt that is common for new businesses. And among those that are willing to juggle a monthly student loan payment with a monthly business loan payment, they often find it much harder to get approved for a capital loan once the potential lender sees that they are already straddled with significant student loan debt.

Looking to the Future

Ultimately, the national student loan debt crisis is negatively affecting the U.S. economy in ways that will become even more apparent over time. The housing market, which is rebounding since the recession, is hampered by a segment of the population that wants to purchase but is held back by student loan debt. Family economics and small business growth are also affected. If a solution isn’t decided upon, it’s possible that within the next decade the value of a college education, both individually and to the economy, could be outstripped by the cost to obtain it.     

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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