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How Does Student Debt Affect the Economy?

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Among the economic benefits of student loans is that they allow more people to get a higher education. But there are definitely negative effects of student loans as well, including tamping down spending and dragging on overall growth.

Slows the growth of new businesses

Why is student debt a problem? Well, research from the Education Data Initiative (EDI) suggests that having high student loan debt is correlated with a decrease in starting new businesses. Karthik Krishnan, an associate professor of finance at Northeastern University, estimates that a person with $30,000 in student loans is 11% less likely to start a business than one who graduated debt-free.

The truth is you will have less capital to pursue entrepreneurial projects if you’re struggling to keep up with student loan payments. And a lack of new businesses can result in fewer jobs over the long run, leading to slower economic growth and productivity.

Lowers rates of homeownership

The EDI data have shown that students are 36% less likely to purchase real estate when they have student loan debt. Responsible borrowers are cautious about taking on too much debt if it could lead to student loan default and damage their credit scores, making future financing near impossible.

Although it’s possible to buy a house with student loan debt, many borrowers simply can’t afford it. In some cases, financial struggles force them to move back home with their parents after leaving campus.

Ultimately, a drop in homeownership can cause a significant decrease in revenue for banks and investment firms, impacting the economy’s financial well-being.

Makes it harder to weather a recession

Carrying high debt can make it extremely difficult to stay afloat during times of economic distress, such as during the Great Recession in 2008 or the COVID pandemic.

Although building an emergency fund might feel impossible when paying off debt, doing so can help you dodge financial disaster if you lose your job or run into large, unexpected expenses.

Suppresses consumer spending

The effects of student loan debt can cause many borrowers to reduce their spending and forgo certain purchases. For example, a previous LendingTree survey from 2018 showed 1 in 10 borrowers couldn’t buy a car because of their debt.

In the U.S., paying for goods and services plays a key role in keeping the economy running and growing. So for a consumer-driven economy like ours, less spending means lower revenues and profits, which can slow overall growth.

Delays traditional life milestones

Research shows student loan borrowers are waiting longer to pass certain life milestones than the previous generation did. With high student loan payments, many borrowers often can’t afford the same experiences their relatively debt-free parents did.

“Student loan debt can be a barrier to other financial milestones,” said Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. “There are many studies out there showing that this debt is causing consumers to delay first-time home purchases, getting married, having children and retirement, just to name a few.”

Although shifting social norms impacts some of these statistics, this research also suggests that student loan debt can delay marriage. In this case, high student loan balances might put nuptials and plans for a family out of reach for many debt-burdened borrowers.

Puts a damper on retirement savings

The nation’s student loan debt load might leave an entire generation unprotected when they reach retirement age — or at least less protected.

Data analysis from the AARP has shown that borrowers who prioritize their student loan debt over saving for retirement typically need to work two to seven more years to reach the same retirement balances as their debt-free peers. Furthermore, those with outstanding student loans have only about half as much invested at age 30 than peers without debt.

A lack of retirement savings could postpone your retirement or force you to rely more heavily on programs like Social Security, which might not sufficiently cover your needs.

Shifts economic power away from students

While a college degree remains valuable, financial analyst and writer Dennis Shirshikov believes that student loans disempower students more than they help them.

“Student loan debt has shifted economic power away from students,” Shirshikov said. “Universities, lenders, investors and others have benefited from the increase in prices. They have more capital for investments, risk-taking and general projects.”

Meanwhile, the EDI finds a bachelor’s degree has a median annual income of $58,874, with the average cost of attending a public four-year in-state college at $102,828 — which doesn’t include student loan interest. Sadly, the price of higher education is a burden many graduates must carry for years (or decades) to come.

Impacts racial and economic justice

We already know that millions of Americans are drowning in student loan debt. However, borrowers from low-income families and students of color often take the biggest hit.

For starters, data shows that Black and Hispanic Americans typically face more barriers in attending college and are less likely to finish their degrees than their white peers.

Furthermore, students who come from affluent families are generally able to tackle their student loans more quickly, thus allowing them to enjoy a debt-free life sooner.

Almost 90% of borrowers with defaulted student loans received a Pell Grant due to low income and wealth. Additionally, about 50% of defaulters didn’t complete their degree — meaning they don’t have access to higher-paying jobs to cover monthly student loan payments.

Although minority scholarships and need-based aid can reduce costs, with income-driven repayment plans lowering monthly payments, the reality is that low-economic students may struggle more to break free from the crushing weight of student loan debt.

Increases earning potential for those with bachelor’s advanced degrees

There’s no denying the negative effects of student loans on our economy. However, as mentioned at the beginning of this article, there’s a good side too.

Higher education still remains an effective pathway to economic mobility, and student loans can help make it happen. Those with college degrees tend to have higher incomes and lower unemployment rates.

According to Justin Draeger, CEO and president of the National Association of Student Financial Aid Administrators (NASFAA), student loans can have a positive impact as long as the borrower finishes their degree.

“Since loan debt is used to pay for educational expenses, yes,” said Draeger, when asked if loans can positively impact the economy. “Even those with some education are statistically better off and more likely to earn more money over their career than those who are without postsecondary education.”

Data from the U.S. Bureau of Labor Statistics show how the typical median weekly wage increases based on level of education:

  • High school diploma: $626
  • Bachelor’s degree: $1,334
  • Master’s degree: $1,574
  • Professional degree: $1,924

How will student debt affect the economy in the future?

For better or worse, student debt has affected the economy in ways we’re still discovering.

While mass student loan forgiveness could increase purchasing power and thereby benefit the economy, the real solution needs to address the cost of college. Yes, you can eradicate student loans and experience an economic boost due to the freed-up income, but it would only be a temporary solution.

Experts believe more educational institutions need to implement a tuition-free or debt-free policy. Some ‘no-loans’ colleges are paving the way in helping students achieve a higher education without the burden of student debt.

The more affordable and accessible a higher education is for all Americans, the more we can enjoy the long-lasting benefit to our economy. When students win, we all win.

 

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