Refer a friend to refinance their student loans, get $400. Click here to learn more! đź’°đź’°đź’°

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

effects of student loan debt

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 2017!
LenderRates (APR)Eligible Degrees 
Check out the testimonials and our in-depth reviews!
2.61% - 6.74%Undergrad & GraduateVisit SoFi
3.64% - 7.20%Undergrad & GraduateVisit Laurel Road
2.62% - 6.74%Undergrad & GraduateVisit CommonBond
2.52% - 7.26%Undergrad & GraduateVisit LendKey
2.54% - 8.39%Undergrad & GraduateVisit Citizens
2.61% - 6.49%Undergrad & GraduateVisit Earnest
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.

Published in Debt, Student Loans