6 Ways Your Student Debt Ultimately Hurts (and Helps) the Economy

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

effects of student loan debt
Logo

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

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.

Among recent graduates, one in five says that their student loans are holding them back from starting a business, according to the 2015 Gallup-Purdue Index.

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 2018!
LenderVariable APREligible Degrees 
Get real rates from up to 4 Lenders at once

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. 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.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.