How Does Student Debt Affect the Economy? Experts Weigh In

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With our collective student loans reaching a staggering $1.71 trillion, it’s not surprising that education debt has some influence on the U.S. economy. Nearly 45 million Americans owe student loans, and more than 1 in 10 of those borrowers were delinquent or in default before the coronavirus crisis struck.

You might be wondering just how much student debt affects the economy. According to experts, all this debt could slow economic growth, with borrowers prevented from fully participating in American capitalism. If you have burdensome student loan debt, the rationale goes, you’re less likely to start that business, buy that home or make that investment in the stock market.

Here are some specific ways experts see the effects of student loan debt on the economy:

Slows the growth of new businesses

According to a report from the Federal Reserve Bank of Philadelphia, higher student loan debt means fewer new businesses are created. Karthik Krishnan, an associate professor of finance at Northeastern University, estimated that a person with $30,000 in student loans is 11% less likely to start a business than one who graduated debt-free.

“[Student debt] slows the growth of small businesses,” financial advisor Scott Pedersen told Student Loan Hero. “If you’re paying off student loans or other types of debt, you have less capital to start a new business. New businesses have an impact on long-term employment.”

In other words, fewer new businesses could mean fewer jobs in the long run.

Joe Bailey, business development consultant at My Trading Skills, also sees student loans as discouraging would-be entrepreneurs.

“One devastating impact of post-college debt is that it stifles the entrepreneurial spirit amongst the people,” Bailey said. “A decline of entrepreneurial activities translates to lower employment levels, and economic output, which brings the national income down.”

Ultimately, student loans get in the way of the spending and business engines that power the economy. And this can have far-reaching effects linked to slow economic growth and productivity.

Lowers rates of homeownership

Student loans hold back borrowers who might otherwise be saving for or purchasing a home. Among student loan borrowers, 43% have delayed homeownership due to their debt, according to a 2018 Student Loan Hero survey. They’re often forced to move back home after leaving campus.

“One of the main ways student loan debt affects the economy is that it prevents millennials from purchasing real estate,” said Igor Mitić, the editor-in-chief of finance website Fortunly.com. “Saving for a down payment is difficult when you are still paying off student loans, not to mention it can increase the chances of defaulting. In turn, this affects credit scores and the ability to qualify for mortgages and other types of loans.”

According to a 2019 report from the Federal Reserve, student loan debt has prevented an estimated 400,000 young Americans from purchasing real estate. With fewer homebuyers, home prices can stagnate.

Learn More: Should You Pay off Student Loans or Buy a House?

Homebuying trends also ripple into the financial industry. If fewer people are buying homes, then fewer people are likely to take out mortgages, which can be an important revenue source for banks and investment firms alike.

Makes it harder to weather a recession

High rates of debt could also mean student loan borrowers have a harder time if the economy is brought down by bigger forces, such as the Great Recession in 2008 or the COVID-19 pandemic.

“Student loans make it harder to go through downturns or recessions in the economy,” he said. “The more debt that somebody has, the less they will have normally in savings and reserves to cover any shortfall during a slowdown in the economy.”

Although building an emergency fund might feel impossible when you’re paying off debt, the effort may prove well worth it if you lose your job or run into a large, unexpected expense.

Learn More: How to Prepare for a Layoff If You Have Student Loans

Suppresses consumer spending

Many student loan borrowers choose to spend less, and sometimes they can’t afford to spend on items they otherwise feel ready to buy.

For example, the previously mentioned Student Loan Hero survey showed 1 in 10 borrowers couldn’t buy a car because of their debt.

According to financial analyst Riley Adams, some of the effects from this decrease in consumer spending will continue to play out in the future.

“Student loans serve as a detriment to the broader economy, with the true effects yet to be fully felt,” said Adams. “In much the way other debt works, borrowers (planned) to finance a purchase in the present at the expense of financial flexibility and wherewithal in the future. As a result, these loan repayments will take away from the usual economic activity an economy would experience as a large generational cohort ages.”

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.

Delays traditional life milestones

Student loan borrowers are waiting longer to pass certain life milestones than the previous generation did. With high student loan payments, many borrowers likely can’t afford the same experiences their relatively debt-free parents did.

“Student loan debt can be a barrier to other financial milestones,” said Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. “There are many studies out there showing that this debt is causing consumers to delay first time home purchases, getting married, having children and retirement, just to name a few.”

Although shifting social norms might also impact some of these statistics, research shows plainly that student loan debt delays marriage. Especially high student loan balances can play an even larger role, putting nuptials and other goals out of reach for many debt-burdened borrowers.

Puts a damper on retirement savings

The nation’s student loan debt might also leave an entire generation unprotected when they reach retirement age — or at least less protected.

In fact, consumers with outstanding student loan balances have only about half as much invested at age 30 than peers without debt, according to a 2018 study by Boston College’s Center for Retirement Research.

“Those with student loans often can’t afford to set aside much for retirement until they fully repay those loans,” said Adams. “This means millennials won’t have the benefit of compounding returns for as long as they need and will not have the current entitlement program benefit payout levels when they do reach retirement age.”

A lack of retirement savings could mean people are working longer or relying more heavily on programs like Social Security, which might not sufficiently cover people’s needs.

Learn More: Pay Off Student Loans or Save For Retirement? Decide in 5 Steps

Shifts economic power away from students

While a college degree remains valuable, financial analyst and writer Dennis Shirshikov suggested that student loans have disempowered students more than they’ve helped them.

“Student loan debt has shifted economic power away from students,” Shirshikov said. “Universities, lenders, investors and others have benefited from the increase in prices. They have more capital for investments, risk-taking and general projects.”

Mayotte also noted that the burden is no longer the “young person’s issue” people think it is.

“Half of all [student loan] borrowers are over the age of 30, a quarter are over 45 and the fastest growing population with student debt are the over-65s,” said Mayotte. “This means that the effects on the economy are much broader and long-lasting than they were even 15 years ago.”

Increases earning potential for those with bachelor’s advanced degrees

According to many experts, the impact of student loans on the economy is pretty bleak. But that doesn’t mean student loans don’t have any positive impact on the economy.

Student loans enable many borrowers to pursue a bachelor’s or graduate degree, and higher education remains an effective pathway to economic mobility. Those with college degrees tend to have higher incomes than those without, and greater rates of college education are usually associated with lower unemployment.

“An educated workforce can positively impact the economy,” Mayotte said. “High-income states almost always correlate to highly educated states. The key is to ensure that the debt level needed to attain the education doesn’t outweigh the positive effects of the education.”

According to Justin Draeger, CEO and president of the National Association of Student Financial Aid Administrators (NASFAA), student loans can have a positive impact overall as long as the borrower finishes their degree.

“Since loan debt is used to pay for educational expenses, yes,” said Draeger, when asked if loans can positively impact the economy. “Even those with some education are statistically better off and more likely to earn more money over their career than those who are without postsecondary education.”

In fact, the typical median weekly wage of bachelor’s degree recipients ($1,248) and master’s degree recipients ($1,497) trumps that of workers with only a high school diploma ($746), according to May 2021 data from the U.S. Bureau of Labor Statistics.

Plus: How will student debt affect the economy in the future?

For better or, more often, worse, student debt has affected the economy in ways we’re still discovering. Of course, we’re also still learning how student debt will affect the economy of tomorrow.

While Mayotte suggested that oft-debated mass student loan forgiveness could increase purchasing power and thereby benefit the economy at large, the real solution needs to address the cost of college.

“The cost of education is what has driven the debt levels to the point we are today,” Mayotte said. “Sure, you can wipe out all the student loans, and there would be an economic boost due to the freed-up income, but it would only be temporary as consumers would still need to borrow — a lot — to go to college.”

Learn More: Busting 10 Myths as Student Loan Forgiveness Is Debated

In Mayotte’s eyes, tuition-free or debt-free college is needed to return economic power to students.

“To me the free or debt-free college proposals hold more weight, as they address the illness itself rather than just the symptoms,” she said. “Don’t get me wrong — if we could find a way to do both, we should — but reducing the debt consumers have to take out in the first place would be the thing that would have the longer-lasting benefit to the economy.”

Andrew Pentis contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.88% – 6.15%1Undergrad
& Graduate

Visit Splash

1.88% – 5.64%2Undergrad
& Graduate

Visit Earnest

2.50% – 6.85%3Undergrad
& Graduate

Visit CommonBond

1.89% – 5.90%4Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.39%5Undergrad
& Graduate

Visit SoFi

1.88% – 5.64%6Undergrad
& Graduate

Visit NaviRefi

1.90% – 5.25%7Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

2.13% – 5.25%8Undergrad
& Graduate

Visit PenFed

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

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Interest Rate Disclosure

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.59% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance 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 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.

Auto Pay Discount Disclosure

You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

Student Loan Refinancing Loan Cost Examples

These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.

One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.

© 2021 Earnest LLC. All rights reserved.


3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of April 29, 2021. Information and rates are subject to change without notice.
 


5 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 2.74% APR to 6.74% APR (with autopay). Variable rates from 2.25% APR to 6.39% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.


6 Important Disclosures for Navient.

Navient Disclosures

1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply.

– To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered.

– You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

– You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility.

– The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check www.navirefi.com for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product.

– Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105.
Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit https://navirefi.com/lending-licenses for a full list of licensed states.


7 Important Disclosures for LendKey.

LendKey Disclosures

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.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.


8 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are 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.