The phrase “student debt” seems to rarely pop up in a news headline these days without being followed by the word “crisis.”
First off, the total amount of student debt has almost reached a staggering $1.3 trillion. And while more than 44 million Americans have student debt, about 7 million are also in student loan default as of last year.
What’s more, among the 70 percent of college graduates with student debt, the average balance is over $37,000.
Still, while some view overall student loan debt as limiting for the U.S. economy, others see it as an important investment in human capital.
Although many economists have looked into how student loans affect the economy, it can be tricky to measure the impact student loan debt has on an individual level. Let alone a national level.
Yet, when we took a deep dive we were able to take note of a few trends indicating how student loan debt affects the economy. Here’s everything we found about it: the good, the bad, and the somewhat surprising.
Negative effects of student loan debt
On an individual level, the limiting effects of student loan debt are obvious. Mostly because those with debts have the financial obligation of making monthly student loan payments.
Essentially, when 44 million Americans are putting a big chunk of their monthly income towards their student debts, they aren’t spending on other economy-boosting goods or services. They’ll also have less money to save, invest, or even start a business.
Here are three main ways student loans can indirectly limit or slow economic growth in the U.S.
1. Student loan debt stifles spending
Many student loan borrowers choose to spend less. Or, they can’t afford to spend on items they otherwise feel ready to buy.
For example, nearly half of student loan borrowers have put off buying a car because of their student loan debt, according to our survey from last year.
And even during the holiday season, a third of shoppers say they will limit holiday spending due to student debt.
In the U.S., when people pay for goods and services, it keeps the economy running and growing. So for a consumer-driven economy like ours, less spending means lower revenues and profits. Which in turn can slow financial growth.
2. Student debt slows the housing market
Student loans definitely hold back borrowers who would otherwise be saving for or purchasing a home.
Among student loan borrowers, 41 percent have delayed homeownership. Meanwhile, 27 percent haven’t even managed to make it out of their parent’s home yet.
With fewer homebuyers, home prices stagnate. And, homeowners are less likely to build equity in their home.
Home-buying is also tied to the mortgage market. If fewer people are buying homes then fewer people are likely to take out mortgage loans, which can be an important revenue source for banks and investment firms alike.
3. Student debt holds back new businesses
Another important growth factor in the American economy is the growth of new businesses.
Overall, more student debt means fewer new businesses, according to a report from the Federal Reserve Bank of Philadelphia.
And, 25 percent of graduates with higher student loans (more than $25,000) are delaying their plans to start a business due to those debts.
Additionally, for those who take the plunge and try to start a business, getting approved for business loans is harder with student debt.
Ultimately, student loans get in the way of the spending and business engines that power the U.S. economy. And this has far-reaching, indirect effects linked to slow economic growth and productivity.
How student loans affect the economy — for the better
Student loans definitely hold back borrowers financially. And, by extension, the economy.
But a recent report from the White House controversially asserts that student debt is a net positive for the American economy.
“The main macroeconomic impact of student loans, particularly over the longer run, is via the boost to output and productivity from a more educated workforce,” the White House said in its 2016 report Investing in Higher Education.
Overall, according to the report, student debt is a tool that helps more Americans access a college education. And with a higher education attainment comes a windfall of benefits for individuals and the economy.
4. College degrees raise incomes
A major benefit of a college degree (and student loans that enable earning them) is higher incomes.
Workers who attain a bachelor’s degree gain $1 million in lifetime earnings, according to the White House report. Higher incomes mean these graduates will actually have more money to spend throughout their life.
It’s true that today’s college graduates have more student debt and cannot spend as freely as past generations. But the White House report also found that compared to non-college-educated workers, their earnings still put them far ahead in measurements like homeownership.
5. Lower unemployment
Unemployment is a key economic health indicator. The more jobs that are added, the stronger a country’s business sector becomes.
The White House report also showed that “Individuals with college degrees also see lower unemployment rates and have increased odds of moving up the economic ladder.”
What’s more, unemployment rates among workers with a bachelor’s degree are 41 percent lower than those with an associate’s degree or some college, according to data from the Bureau of Labor Statistics.
And at 2.7 percent, college graduates are just less than half as likely to be unemployed as the average American with the U.S. unemployment rate at 4.9 percent.
More jobs also mean more individuals are earning incomes, keeping up with living expenses, and putting money back into the economy and government.
6. Increases tax revenues
Student debts, and the programs President Obama has introduced to help borrowers manage them are costly for taxpayers.
And, recent estimates show that federal student loan forgiveness programs are set to cost significantly more than previously projected, to the tune of $108 billion.
But while these student debt management programs do cost taxpayers, they can also be viewed as an investment in a college-educated workforce. Workers who are college-educated are more productive and earn more — and pay more taxes, in turn.
“Graduating from college rather than ending schooling with some college was associated with the largest increase in tax payments,” according to a research brief from the RAND Corporation.
Student debt definitely has its downsides for the economy. But the overall impact of student loan debt is a net positive for the economy — at least for now.
However, if college costs continue to rise, they could outpace the actual value of a college education. Still, in today’s world, an investment in a college degree still pays off. Both at the individual and the national level.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|