There are numerous reasons why college is so expensive nowadays. Less state money, more on-campus amenities, and higher administrator compensation contribute to the average college cost outpacing inflation for decades.
This increasing cost makes it impossible for regular students to graduate debt-free.
As student loan debt in the United States continues to rise, many borrowers struggle to manage their debt. That is no surprise, given the average student loan debt of $28,500 for undergraduate students and $65,000 for graduate students.
After graduation, student loans substantially impact borrowers, impacting everything from where they work to how many children they want. Each generation suffers from this persistent, deteriorating financial constraint, which is poor news for an economy that relies on consumer purchasing power.
Read on to find out how student loans affect the economy in both positive and wrong ways.
Higher Education Has a Positive Economic Impact
There are numerous reasons why a college degree might benefit a person, but it also helps the economy. College graduates are often happier, healthier, and wealthier than high school grads. Graduates are also more inclined to vote, donate to charities, and volunteer.
However, although some degrees provide graduates with excellent earning potential, others may leave debtors worse off than if they had never attended college.
Student Loan Debt’s Negative Economic Impact
While graduating from college can lead to a better, higher-paying career, graduating with student loans has some disadvantages. Here’s a rundown of the negative consequences of student loan debt:
- Reduced New Business Growth
- Lower Homeownership Rates
- Reduced Net Worth
- Consumer Spending is Declining
- It is more difficult to keep afloat during a recession.
- Difficulties in Saving for Retirement
- Increased emphasis on social safety net initiatives
- Increased Probability of Delinquency
- Students have less economic power than adults.
- Inequality Across Generations
- Delays in Ordinary Life Events
Reduced New Business Growth
Small business growth tends to slow as student loan debt rises. Students who are heavily in debt cannot afford to take the risk of starting a small business. Even if they desire to start their own business, they are less likely to be approved for a loan or line of credit if they have sizeable personal debt.
They might also be unable or reluctant to work for a start-up that could fail at any time. Student loan debt might make it challenging to take professional risks, such as working for a new company.
Lower Homeownership Rates
According to a 2019 Federal Reserve analysis, student loans constitute a significant barrier to homeownership, preventing 400,000 young Americans from purchasing a home between 2005 and 2014. Another study discovered that students who graduated with debt had residences valued $103,000 less than those who did not have student loans. When you apply for a mortgage, your debt-to-income (DTI) ratio will be calculated.
They will total your monthly loan payments and split them by your pre-tax or gross monthly income. The maximum DTI ratio for mortgage approval usually is 45%, which includes any future mortgage payments. Borrowers with significant student loan balances may also have high DTIs, making it considerably more challenging to qualify for a mortgage. Furthermore, it may be more challenging to save for a down payment, closing charges, and relocation expenditures if you have significant student loan debt.
Reduced Net Worth
As college tuition has risen faster than inflation in recent decades, so has the number of borrowers with student loans. According to Federal Reserve research published in 2013, the average net value of households with student loan debt was $42,800, whereas the average net worth of homes without student loan debt was $117,700.
Consumer Spending is Declining
Borrowers with school loans have less disposable income than non-borrowers. This can have a significant impact on the economy because student loan borrowers have lower rates of consumer spending than non-student loan borrowers.
It is more difficult to keep afloat during a recession.
You have more extraordinary fixed expenses when you have student debt. This can make it more difficult if you lose your work, suffer a medical emergency, or the country is in a recession. People are frequently furloughed or forfeit their employment during a recession. When you lose your job, it can be extremely tough to pay off your student loans, especially if you are already living paycheck to paycheck.
Difficulties in Saving for Retirement
Because borrowers’ student loan payments might be significant, it’s tough to save for retirement with student loans. And while borrowers might try to make the difference after their student loans are paid off, or they start making more money, it can be difficult to overcome the gap after years of not investing.
Investment power is determined by how long your money is invested rather than how much you invest. If you can begin early, you will not have to give as much to achieve the same result. However, if you have to wait until you have paid off your student loans, you must play catch up.
Increased emphasis on social safety net initiatives
Borrowers with student debts are more likely to require and utilize social safety net services such as Medicaid, SNAP, and others. Borrowers are thus more of a liability for the entire government rather than just themselves.
Increased Probability of Delinquency
If you are experiencing financial difficulties, you may find yourself missing student loan payments or possibly defaulting on your debts. The repercussions of failing to pay student loans can have a significant influence on your credit score. This can make it more challenging to qualify for other loans, particularly mortgages. It can also make refinancing your debts to lessen your debt burden considerably more difficult.
Students have less economic power than adults.
Because student loans are so standard, students are finding it more difficult to graduate and begin earning enough to buy a house, marry, and start a family. They can’t afford to buy new cars or go on vacation as frequently.
Instead, they’re putting more money into loans than ever before.
Inequality Across Generations
Generally, whether people are better off now than they were a generation ago is a good indicator of the economy. Student loan debt has surpassed inflation, making it more difficult for future generations to feel that way. Borrowers are not better off than they were a generation ago because education is expensive.
Delays in Ordinary Life Events
It’s a typical path: graduate from college, obtain a job, buy a house, marry, and have a family. Those life milestones, however, tend to arrive more slowly for student loan borrowers than for their peers who do not have student debt.