Ways in Which Your Student Debt Hurts and Grows the Economy

Michael Rotondo is the 30-year old millennial, infamous for getting evicted by his parents from their family house on national TV.

His parents went to court seeking orders to oust him. Michael’s case might be a bit extreme, but there are thousands of millennials today who should have left their nests but have living arrangements similar to Michael’s. The only thing they have going for them is that their parents have not evicted them, and they are putting in a lot of effort to move out.

Research shows that 15% of individuals who have left college and joined the workforce are still living with their parents. Baby boomers, though, got into marriage in their 20s, quickly transitioning from their parents to home ownership.

The high cost of education debt

There is a crowding out effect taking place because millennials have little money to get on by. They are postponing what are considered life milestones, dragging their feet because they cannot afford them.

They are buying fewer homes and cars, and even spending less on themselves. The heavy chains of student loans have ensured that millennials hardly have enough to spend on vacations or chase their dreams and start a business.

Student loan debt has hit a staggering $1.3 trillion, toppling credit card debt as the position of America’s top source of debt along with the long-term loans taken for up to 5-years mostly. It has left over 40 million young adults with a debt average of over $29,000.

This has tainted many a millennial’s credit rate scores, wreaking havoc on their financial life from a very young age. But it is all worth it for an education, right? The American dream is built on the belief that a good education equals a good life.  

This return on investment is not as clear as it was for baby boomers, at least not for every course in universities and colleges. Not all careers pay as well as dental, or medical degrees do. Many millennials are now leaving tertiary institutions with a 90K per head as debt for a liberal arts degree. What ramifications, positive or otherwise, does this have on the economy?

The bad

· Less spending

A growing economy runs on the fuel of its people spending their money on goods and services. However, over 44 million US adults are diverting their income to paying back hefty student loans, rather than boosting the economy with it. They also have very little left with which to save afterward, start a business, or invest.

While Uber and Lyft have gone a long way in eliminating the need for car ownership, most millennials cannot actually afford a car. Wages have been low, and all that’s left has to pay back this debt.

· Fewer home purchases

Baby boomers’ primary goal after college was to settle down and purchase a home. Millennials are different. They are delaying marriages, which affects home acquisition. Marriage plays a significant role in homeownership, increasing the likelihood of home purchase by 18%.

The average marrying age of young adults today is around 30. Children are also coming much later in life, which is a factor that contributes negatively to the chance of home acquisition, too. An Urban Institute research has found out that the high growth of education debt is stifling home purchase. If a person’s education debt ballooned from $50k to $100k, there is a 15% chance that they will not consider home purchase as a priority.

If a whole generation is less willing to purchase homes, this implies that home prices are going to stagnate. Fewer and fewer mortgage loans will also be taken out, which are crucial sources of revenue for financial institutions and investment companies.

· Hampers business growth

Small businesses make up for 99.7% of all companies in the US, totaling  29 million. These small businesses are the backbone of the economy, but according to the Federal Reserve Bank of Philadelphia, student debt is limiting the growth of new companies.  

Statistics also show that 25% of graduates with massive education debt are willing to put off their plans of starting a business. These loans are also making those willing to go the extra mile frustrated by a bank’s apathy towards them due to their debt status.

The good

One year at a public university can cost over $48,000. Four years can cost a small fortune. The average parent is incapable of footing this amount without the help of student loans, which is why student debt can be useful, though it takes an average of 30 years to pay it off. The positives a good education are numerous and, therefore, may make a student loan look like a necessary evil.

· Better income rates

A Federal Reserve Bank of New York report places the income of a  high school graduates at  $28,000 and that of an employee with an undergraduate degree at $44,000. A worker with a degree is set to make at least $1 million in earnings over his or her lifetime. So, while student debt may take away a chunk of those earnings, at least graduates can enjoy a healthier pay stub while at it.

· Reduces unemployment rates

Most jobs out there require a degree to qualify for. Be it teaching, law, engineering, or nursing, most careers require a minimum of two years of study. This essentially means that a degree can open more doors for you in the workplace, reducing overall unemployment rates. A degree will, in fact, give you an edge in a job interview.

A Bureau of Labor Statistics reports that unemployment among degree holders is 41% lower than those without. An advanced degree gives you a 4.9% better chance at employment, while a college certificate gives its holder a 2.7% better chance at employment.

· Increases tax revenue for the government

Workers who earn more essentially pay more taxes. So, while government-funded student loan forgiveness programs will cost the taxpayer over $108 billion, this amount can be seen as an investment that is fruitful for the economy. The more educated the workforce, the more they earn, and the more they will give back as taxes.

While student debt has a lot of negatives, that certainly does not paint the whole picture. Student and parents pursue them because there is value, which translates to better income and less unemployment.

This debt might not be worth accruing, though, if graduates are not going to work hard. Some of the most successful people have never had to deal with the repercussions of high student loans. This includes Michael Dell, Bill Gates, and Larry Ellison.

While that degree may open new career vistas, hard work, resourcefulness, and innovation will make you successful. If you do not apply these virtues to your life, then a student loan might end up looking like a trap set to extinguish your future financial success.