How Student Loan Debt Affects the Economy

By: Guest Author, Chrissy Jones

What does it take for a loan product to reach the level where it is considered calling it a national crisis? The answer is in the trillions. Household debt, which covers items such as mortgages and student and car loans just exceeded the $1 trillion mark and still seems to be on the increase. While mortgages and car loans provide consumers with actual assets, student loans can offer the opportunity for higher income, but it’s not guaranteed. Read on to learn more about how an ever-increasing student loan bill affects the economy.

A Drop In National Spending

The national debt of the U.S. is not left untouched and the need for a stimulus package highlights the importance of keeping the economy going. Although the stimulus package is now in play, it does not take away from the fact that funds are running low and the economy needs a boost. After the financial fallout of 2008, the U.S. economy has slowly climbed upward, but so has debt. This has left millions of Americans without disposable income, which in turn places a lot of strain on the economy. The debt dilemma is not only on an individual level but seems to echo on a national level as well. Student loans are at the heart of the individual debt crisis and make up a substantial percentage of the overall debt.

The Inability to Accumulate Assets

Millennials are finding it hard to scrape together the funds to purchase their own property. The rising property prices are only a part of it and not anything previous generations didn’t have to face. What makes the plight of the millennial a little more difficult, is the lack of disposable income. Student loan repayments tend to take up a large portion of the after-tax income which decreases affordability substantially. The debt burden also lessens the millennial’s ability to set aside funds for a downpayment. The combination of these two factors means that the property market could see a significant dip in the next few years, or a rise in defaults should unscrupulous lenders extend credit and grant the mortgages anyway.

The Need for Alternate Solutions

Living with a high debt-to-income ratio can cause a lot of pressure on a household, which often leads to further debt. This is especially cumbersome when the additional debt is used to service other debt. A better way of approaching high installments is by considering the option of debt consolidation. Those who have student loans often have them for longer periods than many other types of loans, except mortgages, and these loans often involve more than one installment. Not only does this create cash flow difficulty, but also makes it difficult to streamline a budget. With a student loan consolidation option, consumers only have to pay one installment, and oftentimes the interest rates offered are lower. This lowers the drag on the economy, as consumers can free up some of their cash flow which allows more freedom to stimulate the economy.

The Dissolution of the Middle-Class and Pressure on the Poor

The net asset value of Americans has become something of a concern as it seems that only the wealthy are able to accumulate assets. The rest are either classified as below or on the poverty line or kept in poverty due to mounting debt. Student loans are also supposed to provide the poor with the means to get an education, however, seems to keep them on the poverty line as the repayments are just not affordable. The expectation of a higher income once they’re done with their studies have left many students out of pocket as the reality does not always meet the expectation. Low entry-level salaries, even for graduates, and internship programs keep students from meeting their monthly obligations.

The Reluctant Saver

Student loans are not as easy to come by in other parts of the world, as many institutions in other countries require the loans to be secured. This means tapping into home equity or using a personal loan to fund studies. For Americans, the ease of applying for a student loan puts the economy under enormous pressure as it creates a society that is reluctant to save. This means that whenever funds are required for larger expenses, the go-to product is debt. Those who don’t save are also less likely to invest which can spell disaster for those who wish to retire. A society that doesn’t save becomes a burden to the economy.

Student Loans in the Red

There are few things as devastating to economic ratings as a low percentage of debt repayment, and student loan defaults are on the increase. This makes it tough for foreign and local investment which places additional strain on the economy. It also has an effect on an individual level, as consumers will now have to face the consequences of a lowered credit score which limits their ability to apply for further debt or even refinance their existing debt.

Student Dropouts and the Double-Edged Sword  

Student loans place a tremendous burden on graduates who need to enter the workforce, knowing that there is a mountain of debt to pay off. But what about the students who never graduated? Incomplete degrees don’t afford a better job and certainly affords no motivation for non-graduates to repay the loans. This means an increase in defaults for those who don’t even have a degree to show for it. Not only does this increase the bad debt book, but also a decline in credit bureau scores. This has a direct impact on the economy as there are college dropouts with bad credit that struggle through life without the means to take their studies further or the funds to get out of debt.

Student loans may seem like the only option when it comes to further education, but consumers should also consider other options such as part-time work and savings. It also helps to choose a shorter repayment term if affordable, as this will not only lower the time burden but also the overall interest paid, if applicable.

Guest posts do not necessarily reflect the views of FocusEconomics

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Date: March 16, 2018

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