How The Student Loan Bubble Affects The Economy
Surpassing the market value of media giants Microsoft and Facebook combined, the national student loan debt ceiling is coming up on crisis levels. The United States is no stranger to financial disasters; the Great Depression still within living memory, the mistakes of the past are perhaps going unheeded as we approach yet another potential crisis.
Reaching $1.4 trillion, millions of Americans from recent grads to Gen X continue to struggle to make monthly payments. To make it worse, there’s only a lifetime ahead for this to go on.
What’s The Problem With All This Debt?
College graduates leave their hallowed halls of learning with more than just a degree to show for it. On average, recent college grads are in the hole for nearly $30,000 and just ten years to pay it all back.
Monthly payments come out to around $400 a month, not a small amount for fresh-out-of-college graduates. The burden of an extra, hefty bill every month doesn’t just put pressure on an individual’s bank account, it also has huge ramifications for the economy at large. This is especially true since many Americans struggle to make payments.
Millennials are spending less and less on discretionary purchases every year. Average daily spending by 18 to 34-year-olds is down by $19 since 2008. By the time they reach age 30, millennials are less likely to start their own business. 42% are citing that they do not have the financial means to enter entrepreneurship.
It takes a recent college grad, on average, 12 years to save enough for a down payment on a home. Over 80% of people aged 22-35 that have not yet purchased a home blame their student loan debt. On the other hand, 47% of Americans are putting off buying a car. One in seven American couples are waiting to get married as a result of financial roadblocks
From A Drag On The Economy To The Next Bubble
So, how are we going to manage this bubble that’s about to burst?
For those living and struggling with student loan debt, there are options to help make repaying these loans easier and faster. Income-based repayment, rather than fixed repayment base on loan amount plus consolidation options means lower interest rates, lower monthly payments, and avoidance of deferring loans. Deferment rates are highest amongst young and recent graduates, with 26% of millennials and 77% of Gen Zers choosing deferment.
Additionally, American graduates are given just one-third of the time to pay back their student loans in comparison to other countries. Extending the period of time in which to repay loans helps in the short term by lowering monthly payments. It also gives young people more options for saving money and stimulating the economy.
In 2013, Congress made moves that actually lowered the general interest rates for student loans, but these changes were not made immediately available to individuals who had taken loans out prior to the change.
- Repayment period in the US is ten years; in England, it is 30 years
- Extending the time provided to pay back loans will lower monthly payments, but may increase interest
- The pre-2013 rate was 7%; 2018 rate was down to 5.05%. Lowered interest rates even by just a few points can help save the borrower thousands of dollars over time and potentially help pay off loans quicker.
However, some experts agree that it will take more aggressive and even “radical” changes to make lasting progress. This calls for a massive overhaul to not only loan policies but educational standards as well. The outright cancelation of loans, while not entirely unheard of, is rare and only available to certain careers.
Nurses and public school educators have the option to cancel their loans after a period of time. However, canceling all student loan debt could change the game completely. Loan forgiveness would encourage consumers to spend more of their money on economic goods and services, rather than on repaying on debt and interest, to stimulate the economy. On the other hand, it could increase taxes for everyone.
How Could Less Student Loan Debt Affect The Overall Economy?
A step further from loans canceled outright, some experts suggest hitting the issue right at its source is the most effective solution: free public college. Existing in several European countries, the precedent for free college has already been set and acts as a living, working “experiment” in Germany and Denmark.
From Senator Bernie Sanders’s proposed 2017 College for All Act, it was estimated to cost $47 billion per year to manage free college and states. Things are looking up in such states as New York and Tennessee as they’re already working on free tuition for in-state students in public colleges.
Canceling student loan debt would increase GDP by up to $108 billion per year for the next decade. Canceled student loans would add up to 1.5 million jobs into the economy. No tuition costs would dramatically reduce the financial burden of earning a college degree, influencing the economy as a whole.
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Author: Brian Wallace
Brian Wallace is the Founder and President of NowSourcing, an industry leading infographic design agency based in Louisville, KY and Cincinnati, OH which works with companies that range from startups to Fortune 500s. Brian also runs #LinkedInLocal events nationwide, and hosts the Next Action Podcast. Brian has been named a Google Small Business Advisor for 2016-present and joined the SXSW Advisory Board in 2019.