How Does Student Debt Affect the Economy? Experts Weigh In

 June 28, 2021
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Student Debt Economy

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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 “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.

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1 Important Disclosures for Splash Financial.

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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.

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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 $9 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

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3 Important Disclosures for LendKey.

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Refinancing via 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 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 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 09/09/2022 student loan refinancing rates range from 4.13% APR – 7.39% Variable APR with AutoPay and 2.99% APR – 9.93% Fixed APR with AutoPay.

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

Earnest Disclosures

You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% 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.

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You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% 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.

6 Important Disclosures for SoFi.

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Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR 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. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

7 Important Disclosures for Purefy.

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Purefy Student Loan Refinancing Rate and Terms Disclosure: Annual Percentage Rates (APR) ranges and examples are based on information provided to Purefy by lenders participating in Purefy’s rate comparison platform. For student loan refinancing, the participating lenders offer fixed rates ranging from 2.73% – 7.99% APR, and variable rates ranging from 1.74% – 7.99% APR. The maximum variable rate is 25.00%. Your interest rate will be based on the lender’s requirements. In most cases, lenders determine the interest rates based on your credit score, degree type and other credit and financial criteria. Only borrowers with excellent credit and meeting other lender criteria will qualify for the lowest rate available. Rates and terms are subject to change at any time without notice. Terms and conditions apply.  

8 Important Disclosures for Citizens.

CitizensBank Disclosures

Education Refinance Loan Rate Disclosure: Variable interest rates range from 3.69%-9.92% (3.69%-9.92% APR). Fixed interest rates range from  4.49%-10.11% (4.49%-10.11% APR). 

Undergraduate Rate Disclosure: Variable interest rates range from 6.39%- 9.60% (6.39% – 9.60% APR). Fixed interest rates range from 6.58% – 9.79% (6.58% – 9.79% APR).

Graduate Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).

Education Refinance Loan for Parents Rate Disclosure: Variable interest rates range from 3.69%- 9.09% (3.69%- 9.09% APR). Fixed interest rates range from 4.49% – 9.28% (4.49% – 9.28% APR).

Medical Residency Refinance Loan Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).