3 ways student debt impacts the economy

During the height of the pandemic, college graduates were spared some of the toughest consequences. The Bureau of Labor Statistics reports that workers with a bachelor’s degree are less likely to be unemployed and earn 67% more than workers with just a high school degree. In addition, university graduates live longer than those without a university degree.

While student loans can be crucial in helping Americans access these benefits, economists say that student debt is holding the economy back.

Approximately 45 million Americans owe a total of $ 1.7 trillion in student debt. And although the payments for the federal student loan have been suspended since March 27, 2020, the student loan crisis is still looming. The moratorium is set to expire on October 1, 2021, and politicians and experts are warning that if payments are resumed, millions of borrowers could find themselves in “exceptional financial hardship”.

CNBC Make It spoke to Nela Richardson, chief economist at human resources management company ADP, about three of the biggest economic effects of student debt.

1. Generational inequality

Richardson emphasizes that student debt is a cause for concern as it affects young people disproportionately more than it did in previous generations.

Decades of cuts in education funding mean students are paying much higher college bills than previous generations. Over the past 10 years college costs have increased more than 16% and total student debt has increased 99%. Today, about 70% of college students not only take out loans to finance their education, but also borrow larger amounts.

In addition, young college graduates have entered the labor market in one of the most hostile labor markets in history for young workers. According to an analysis of the Pew Research Center’s BLS data, college graduates saw a bigger drop in labor force participation in 2020 than those who graduated during the Great Recession.

“Student debts weigh heavily on young people. They have the lowest incomes and most likely recently graduated from college,” says Richardson. “We know from our data that young people were disproportionately affected by the pandemic. They were more likely to report job losses, a reduction in job responsibility or a cut in salaries. If you add that to the student debt, it is a pretty big hurdle. “.”

The result is growing generation inequality with significant long-term consequences, she warns: “It’s about macro growth [about student debt] because lack of investment among young people affects the future of GDP growth. “

Federal Reserve data shows that millennials control only 5% of US wealth, while baby boomers control over 52%. In 1989, when the baby boomers were about the age of millennials today, they controlled 21% of the country’s wealth.

2. GDP

Student debt impacts borrowers over time by adding to the debt burden, lowering creditworthiness, and ultimately limiting the purchasing power of those with student debt. Since young people are disproportionately burdened by student debts, they will be less able to participate in the economy and promote their growth in the long term.

“What you want is big investment opportunities over time. That’s good for the economy. That’s good for Wall Street,” says Richardson. “If you don’t have that, then you are seeing slower labor force growth in their prime – and that’s problematic.”

The Federal Reserve estimates that student debt will decrease by about 0.05% of GDP per year. While the current impact may seem relatively minor, as borrowers struggle to buy homes, save for retirement, and invest in the stock market, the impact could become even more significant.

“Who is going to buy all of these assets that the boomers have amassed to feed the economy? Who is going to take over to make sure the stock and asset markets keep rising?” asks Richardson. “Perhaps boomers can inherit these to their children, but that just concentrates wealth, which comes back to the problem of inequality.”

3. Default in Payment

Finally, there is concern that many borrowers will default on their student loans.

Currently, approximately $ 158.5 billion in government-administered student loans are considered in default – and that total may increase once the federal student loan payment hiatus expires. Brookings estimates that by 2023, nearly 40% of borrowers will default on their student loans.

“When you have defaults, it lowers your credit score, and that’s problematic when it comes to doing everything in business from getting a credit card to taking out a mortgage,” says Richardson, citing ADP data on it suggest that student loans account for 35% of heavily depreciating credit balances, more than three times the default rate of mortgages.

Richardson fears that difficulties with student loans will prevent borrowers from generating wealth through means such as buying a home or starting a business. “When you think about how the middle class builds wealth over time, there are two options in the US: home ownership and entrepreneurship,” she says.

While consumer spending appears to be stable for now, Richardson insists that the student debt crisis should be addressed in order to sustain economic growth.

“If you focus very much on the here and now and the current economic recovery, you can shake off consumer debt,” she says. “But if you care about the future and think about what will lead to growth and investment, then student debt can block that.”

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