Student Loan Debt, Its Effect on the American Economy, and If We Should Forgive it All

Blogger Jake writes about a costly epidemic crushing our nation, specifically putting a huge burden on young people who are fresh out of college with a mountain of student debt trying to survive in an increasingly expensive world.

By Jake Sonderman, Business Editor

As of the first quarter of 2021, total student loan debt is numbered at $1.74 trillion (fred.stlouisfed.org). The average student loan debt amount, for the 43.2 million people with student loan debt, is $39,351. The average interest on these loans is 5.8%; the average monthly payment is $393, and the average timeline to pay off the loans is 20 years. 15% of American adults have student loan debt, of whom 82.3% are above the age of 25 (educationaldata.org). In 2016, 3% of individuals 65 to 74 were still paying off student loan debt (washingtonpost.com). The primary cause of this is skyrocketing tuition rates, which have risen 183% since 1998, 3x faster than the rate of inflation (aei.org), second only to rising hospital service costs.

So how does student loan debt affect our economy?

First, it hurts the housing market. When adults have to pay monthly payments on a student loan, they are less likely to take out a mortgage on a house and add to their monthly bill. The Fed’s survey of consumer finances notes that student loan debt kept 400,000 individuals from home ownership. This contributed to 2% of the 8.8% drop in home ownership for those 20-40 from 2005 to 2014 (washingtonpost.com).

Student loan debt also stifles entrepreneurship. According to Prof. Karthik Krishnan of Northeastern University, individuals who graduate with $30,000 in student loans are 11% less likely to start a business (cnbc.com). This is due to of course a lack of capital because of the student loan, and because of difficulty obtaining credit to start a new business.

The Federal Reserve has also stated that it intends to do more research on the effect of student loan debt on credit later in life, and that preliminary data suggest that “higher student loan debt early in life leads to a lower credit score later in life” (washingtonpost.com). Ability to obtain credit not only has an effect on the housing market and entrepreneurship, but on the auto industry and other industries that rely on credit to sell their products.

All of this has led to calls by progressives such as Senate Majority Leader Chuck Schumer (D) to forgive $50,000 of student loan debt. This call sounds very appealing at first glance, and forgiving this much debt would certainly give an adrenaline rush to the economy, but I don’t think it is a good idea, and I don’t think it is a very progressive idea.

Those with college degrees make substantially more money than those who don’t. As of 2020, high school graduates made a median salary of $38,792 a year, while college graduates with a bachelors made a median salary of $64,896 (Northeastern.edu). Student loan debt forgiveness is, in practice, a stimulus check for people with student loan debt. Student loan debt forgiveness would have an anti-robinhood effect, giving more money to those who make more money. This is also exacerbated by the fact that those with master’s and doctorate degrees make substantially more than those with a bachelor’s degree, and also have more student loan debt (educationdata.org). This is why it almost surprises me that some progressives are pushing so hard for this, as it would certainly contribute to more income inequality. And, even if we did shell out the trillions of dollars to do this, it’s still treating the symptoms rather than the problem, as college would still cost the same–and students would continue to take out loans to pay for it.

This doesn’t mean there is nothing we can do to fix the problem. These solutions are solely my opinion, so take them with a grain of salt. The root cause of rising student debt is rising tuition rates. This is simply caused by rising demand over the past decades. The New York Fed has also reported that for every dollar of federal loan expansion and Pell Grants, tuition increases by 55-65 cents (forbes.com). This means that expanded federal loan programs and grants are essentially putting gasoline on the fire. There’s not an obvious solution or an easy fix to this problem because having high demand for college is a good thing and having federal support to pay for it is also good. In my mind, there are two options that aren’t necessarily mutually exclusive. One, mandate that public universities justify tuition increases and require justification not include non-teaching staff and substantial wage increases for that small number of administration officials at the top. Two, roll back federal grants and loan programs. I know this sounds totally backwards, since these two things are entirely for the purpose of helping more people go to college. But, if federal grants and loans drive up tuition, even for those receiving grants, then doesn’t that defeat the entire point? The rollback of these programs would of course have to be followed by regulation to ensure that predatory private loans don’t take the place of federal loans.

This issue is very real to us seniors graduating and continuing on to college. To those who aren’t yet seniors, my advice would be to strongly consider scholarships for a college that might not be your first choice versus taking out loans for your first choice. Choosing a college is incredibly hard and also important, but name and size really aren’t as important as they always seem to be. I hate to say it, but it’s not just about what college you go to, it’s about what you do while you’re there.

Editor-in-Chief: Roman Rickwood

Sources:

cnbc.com/2018/10/22/starting-a-business-when-you-have-student-loans-can-be-a-challenge.html

https://www.washingtonpost.com/business/2019/01/18/student-debt-has-kept-home-ownership-out-reach-young-families-fed-reports/

https://www.federalreserve.gov/econres/scfindex.htm