Student Loan Debt’s Effect on the U.S. Economy

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Updated on Friday, April 30, 2021

The effects of student loans can be a double-edged sword.

On one hand, your student loans enable you to earn your degree and get qualified for high-paying jobs. But repaying that debt can eat away at your paycheck and cause a lot of stress in your day-to-day life.

Just as the effects of student loans on the individual level are a mix of positive and negative, so too are their impact on the economy. With Americans owing a collective $1.71 trillion in student loans, we took a closer look at how this debt impacts the U.S. economy.

Effects of student loans on the economy

From the good to the bad to the ugly, here’s what we found out.

Student loans put a damper on consumer spending …

The average graduate in the Class of 2019 owed $29,900 in student loans. Debt of this magnitude requires high monthly payments, which can burn through a significant proportion of your income, especially if you’re not making a high salary as a new graduate.

As a result, borrowers have less money to spend in other areas, and some even find it difficult to keep food on the table, as noted in a 2020 Student Loan Hero survey. Overall, many of those who owe student debt find key life milestones must be delayed in order to keep repayment on track,

With more of their money going toward repaying debt, student loan borrowers aren’t able to spend as much in other areas.

… but they also lead to higher incomes

Despite the debt that often comes with it, a college degree remains a pathway to high-paying jobs. According to the Bureau of Labor Statistics, the median weekly earnings for a bachelor’s degree holder was $1,248 in 2019, as compared with $746 for those with a high school diploma.

“Most students are graduating with some debt, but college graduates statistically still make more money than non-college graduates, even when you factor in student loans,” Charlie Javice told MagnifyMoney. Javice is the founder and CEO of Frank, a company that helps students and their families navigate the financial aid process.

So while many college graduates are dealing with debt payments, the average grad also reaps the benefit of a larger income, thanks to their college education.

Student loans slow the growth of new businesses …

Since recent graduates owe more in student loans than in generations past, many are hesitant to take on additional debt to start a business. A graduate who owes $30,000 in student loans is 11% less likely to start a business than someone who left college debt-free, Karthik Krishnan, an associate professor of finance at Northwestern University, told CNBC in a 2018 report.

Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business, agrees, noting that “fewer small businesses are created, as it is more difficult for people with student loan debt to accumulate seed capital to start a business.”

Not only are debt-burdened graduates less likely to start businesses, but they might also find themselves with fewer career choices than their debt-free peers.

“In some cases, college graduates take the first decent paying job offer to come their way because of the stress student loans put on a graduate,” said Javice. “Taking the first job offer can often deter graduates from following their passions in their career path.”

So in addition to stifling entrepreneurship, student loans can also force graduates into jobs they might not have chosen otherwise.

… but higher education boosts your chance of employment

Although student loan debt appears to stifle entrepreneurship, earning a college degree can make you more employable.

According to a College Board study, the employment rate for workers with a bachelor’s degree was 83% in 2018, compared with 69% for high school graduates.

The unemployment rate for bachelor’s degree holders aged 25 and over has consistently been about half that for high school graduates.

Although unemployment rose as a result of the coronavirus pandemic, the rate dropped to 4.5% in March 2021, according to the Federal Reserve.

What’s more, the Fed predicts the economy will soon start to grow at its fastest pace in four decades.

If you have an advanced degree, you’ll likely be better able to land a job, even if you had to borrow student loans to get it.

Student loans delay homeownership …

Higher employment rates don’t mean that people are diving into homeownership, though.

“College graduates with student loan debt are forced to purchase homes later on in life because of the financial burden student loans carry,” said Javice.

While 45% of people aged 24 to 32 owned homes in 2005, that number had dropped to 36% in 2014, according to the Fed.

“[Student debt] depresses the housing market and lowers homeownership,” echoed Heider College’s Johnson. “The home improvement industry is negatively impacted, as fewer homeowners means fewer home improvement projects and less money spent on these projects.”

… but colleges are thriving across the U.S.

Apart from the odd for-profit school that gets shut down, higher education in America is at a high point. In the fall of 2018, total undergraduate enrollment was up 26% from what it was in 2000. And it’s expected to continue growing over the next decade, according to the National Center for Education Statistics.

“Today, more Americans are earning a four-year degree than ever before,” said Javice. “Enrollment continues to increase.”

And of the 10 top-ranked universities in the world, according to U.S. News & World Report, eight of them are located in the U.S.

Then again, the rise in student loan borrowing might have people thinking twice about attending high-cost institutions in the years to come. We’ll have to wait and see if future students make different decisions than their debt-saddled parents when it comes to choosing a college.

The impact of student loans is a mixed bag

With Americans owing so much in student loans, some economists see the collective debt as a national crisis. Likening it to the housing market collapse of 2008, some worry a student loan debt bubble could burst and bring the economy down with it.

But at the same time, all this student debt means Americans are more educated than ever. And a highly educated populace would seem to lead to lower unemployment and higher income.

To continue to enjoy the positive effects of education, the U.S. needs to find a way to control the rising tuition rates. By making college more affordable across the board, students can earn their degrees without taking on burdensome amounts of debt that will weigh them down throughout their lives.