The impact of student loan debt on the economy


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Unpaid student loans can put a heavy yoke on personal finances. For millions of Americans, outstanding student debt means years and years of ongoing payments (averaging hundreds of dollars per month).

It can be hard to balance paying back what’s owed on student loans while meeting immediate expenses (like paying rent) or pursuing long-term financial goals (like saving up for a mortgage down payment).

But the impact of student loan debt on the economy goes deeper than dinging individuals’ wallets, affecting entire job sectors.

Student loans now account for more than 40%  of outstanding consumer debt in the U.S., outpacing the amounts owed on motor vehicle loans, for example, by more than $477 billion.

For a wide-angle view of student loan debt and the economy, it’s useful to know just how much money is owed by borrowers across the U.S. on educational debt. In 2020, the cumulative total of student loan debt in the US reached nearly $1.7 trillion , according to data from the Federal Reserve.

By many accounts, the debt load Americans face in furthering their education is growing. In the last decade, student loan debt has more than doubled, increasing from $811 billion a decade ago to its current high.

Related: Will there ever be a student loan bailout?

Understanding how many Americans have student loans

This educational debt load affects tens of millions of Americans. Some 42% of Americans who attended college owe or owed money on their education, with those under 30 being most likely to have taken on debt in order to pursue a post-secondary degree.

A majority—54% and 62%—of adults between the ages of 18 and 29 had to take out a loan to fund education towards an associate or bachelor’s degree, respectively.

That proportion is even higher for grad school, with 75% of young adults with graduate degrees reporting that they had to borrow money.

What does this student loan debt look like on an individual basis? The average grad owes $30,000, up from $17,000 a decade ago.

Given these massive numbers, it becomes clearer how the U.S. college student loan debt crisis and the economy are enmeshed in a tangled tango.

Reviewing effects of student loan debt on the economy

If the total amount of student loan debt held by Americans sounds staggering, it’s because it is. That total—$1.676 trillion—is more than the GDP of countries such as Australia, Spain and Mexico.

And, it’s more than double that of Saudi Arabia and Switzerland. It even outpaces the global box office totals of the 20-highest grossing films in history—a list that includes blockbusters like “Avengers: Endgame,” “Avatar” and “Titanic” by more than 50 times.

With these numbers in mind, let’s dive deeper into the drag that this massive amount of educational debt continues to have on the US economy.

Does student loan debt hamper spending?

For the average individual paying off a student loan, typical payments amount to $200 to $299 each month. For many, especially those embarking on a career and earning an entry-level salary, this ongoing financial obligation can put a deleterious dent in funds they could otherwise spend elsewhere.

Student loan repayments can place a very real squeeze on the money that individuals have available each month for buying, investing, saving or starting a business.

More money spent paying back student loans, in practice, means less money in pocket or saved. Compared to their counterparts who do not have student loans, college graduates aged 25 to 39 with educational debt are twice as likely—22% compared to 11%—to say they’re either just getting by financially or are finding it difficult to stay afloat.

Consumer-driven economies grow when people (aka consumers) spend their hard-earned money. So, millions of people redirecting income towards loan payments can significantly slow or stifle economic growth. If someone is struggling to pay off their student loans, they’ll have less money to spend on purchases that help fuel the economy, businesses and the workforce. The more young people there are who struggle to pay off loans, the greater this economic dampening effect that occurs.

During periods that require economic resilience, such as in a recession, reduced spending can be especially nefarious.

Consumer spending can help to stimulate a floundering economy, mitigating or reversing sudden downturns in specific sectors.

When that spending doesn’t happen during a downturn, it can take longer for the economy as a whole to bounce back.

For those with student debt, it can also be harder to weather a financial crisis, compounding the pain of higher unemployment and lower spending.

For example, during the Great Recession, those with student loans experienced a 12.4% decrease to their net worth. PDF File, compared to a 9.3% decrease among those with no educational debt. This outsized impact may reduce spending both now and later, dampening economic performance in the short-term and long-term.

How do student loans affect the housing market?

With less money to spend, it’s no surprise that people with student loans have fewer funds for big-ticket items, such as buying a home or saving for retirement.

For some 400,000 Americans in their 20s and 30s from 2005 to 2014, student debt thwarted home ownership plans, contributing to an astonishing 8.8% reduction in home purchases  among this age group over a decade.

And since home ownership is a major driver of wealth accumulation, delaying when one buys a home can impact an individual’s net worth for decades to come.

How does student loans stifle entrepreneurship?

Small businesses contribute to the economy in major ways. In fact, they’re responsible for the creation of two-thirds of net new jobs and generate 44% of economic activity in the US.

But, increasing student debt loads are stifling these local engines of economic and job growth. According to one study, having $30,000 in student debt results in an 11% decrease in the probability of starting a business.

And when an individual with student debt does become an entrepreneur, they’re less likely to experience business growth and more likely to fall behind on loan payments.

Paying off student loans can benefit individuals and the economy

When examining student loan debt and the economy, it may be helpful for borrowers to research additional ways to pay off existing student loans—both for their own financial well-being and the future growth of the U.S. economy as a whole.

Here are some strategies that could help those with outstanding student debt to pay down their educational loans faster.

Paying more than the minimum due

Student loans are generally subject to interest. Interest is a percentage charged by the lender on what’s been borrowed. Practically speaking, student loan interest accrues over time. So, borrowers who are unable to pay off their loan balances quickly, typically end up spending more in interest over the entire life of the loan.

In most cases, the longer student loan debt goes unpaid, the more the borrower will owe, as unpaid interest gets added to the base dollar amount that had been borrowed from the lender. This is called compounding, and most student loans compound their interest daily. This can get confusing quickly, so here’s a quick guide on how to calculate student loan interest.

Many lenders allow borrowers the option to submit a “minimum payment.” In the short term, paying a lower amount per month can free up some income or cash. But, paying the minimum does little or nothing to tackle the outstanding loan balance—typically, the borrower is just paying the accruing interest.

Paying more than the minimum can help reduce the length of time it will take to pay off an existing student loan—shrinking as well the amount of interest paid (aka total money spent) during the life of the loan.

While increasing monthly payments may not be manageable for every individual—or even every month—paying a little extra when the opportunity presents can still help borrowers to eliminate student debt faster.

If nothing else, borrowers may want to apply a share of occasional windfalls, such as a work bonus or tax refund, towards outstanding student debt.

Applying for loan forgiveness

Under some circumstances, the government will even forgive federal student loans, essentially canceling out the remaining debt. Some teachers and public servants are among the groups that may be eligible for this federal student loan forgiveness programs.

It’s worth noting that this Public Service Loan Forgiveness (PSLF) program is not available to all workers (including some in the public sector) and applies only to federal, not privately held, student loans.

Refinancing student loans

Refinancing a student loan with a private lender may result in lower interest rates and/or the ability to pay off what’s owed in a shorter amount of time for well-qualified borrowers.

Student loan refinancing replaces an outstanding educational debt (e.g., a student loan) with a new loan. As such, the new loan can have different terms and interest rates.

For some student loan holders, refinancing allows them to reduce their monthly payments or the total interest paid over the life of the loan.

It’s worth remembering, though, that refinancing federal student loans with a private lender means that the borrower will forfeit guaranteed benefits, like access to income-driven repayment or public service forgiveness programs.

Paying Off student loans faster

Student loans have the potential to keep taking a big bite out of the economy. But, unpaid educational debts undoubtedly hurt the borrower even more, creating accruing interest and loan balances that can years and years to pay off.

Refinancing educational debt with SoFi could potentially save borrowers money. SoFi’s loan refinancing comes with no hidden fees—only for late payments.

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