How Our Soaring Student Loan Debt Hurts the Economy and Your Bank Account
Written by
Nicole Spector
Edited by
Rebekah Evans
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Many politicians (most famously, of late, President Biden), have addressed this debt that weighs on the shoulders of so many Americans and are working up ways to alleviate it. Though some programs to help relieve the debt burden are out there, the onus of student loan debt still looms as a mighty beast to be reckoned with for millions.
Student debt most profoundly affects the person who owes it, but it also trickles up, if you will, and impacts the economy at large. Here’s how student loan debt hurts the economy — and your bank account.
Debt Limits Consumer Spending
When you’re buried in debt, including student loan debt, you’re likely living on a tight budget to make your payments and, ultimately, resolve the debt. This means spending less on other things, big or small. And when people stop buying things, the economy takes a whipping.
“High levels of student debt can limit people’s ability to spend on their everyday items and services, which reduces overall consumer spending (bad for the economy),” said Erika Kullberg, a personal finance expert and founder at Erika.com. “It also can delay individuals from purchasing homes, leading to lower demand in the housing market and affecting related industries such as construction and real estate.
Small Businesses With Big Visions May Fail To Launch
“Entrepreneurs with a lot of student debt may also face challenges in securing startup capital, so those business ideas may never see the light of day,” Kullberg said. “I graduated from law school with over $200,000 of student loan debt and put my entrepreneurial venture on hold to pursue the more ‘financially sound’ route: a job at a corporate law firm that would allow me to pay back my debt.”
Student Loan Payments Stall Savings — and Can Hurt Your Credit Score
Student loan debt prohibits you from investing money in assets for retirement or building up an emergency fund because, of course, so much of your money has to go toward paying off the loan(s).
“Monthly student loan payments can significantly dig into paychecks, which severely restricts [your] ability to save for emergencies, retirement or other financial goals,” Kullberg said. “It can also affect [your] credit scores, which may in turn reduce [your] ability to qualify for other loans, such as mortgages or auto loans.”
Student Loan Debt Can Make You More Vulnerable to Economic Shocks
Ultimately, student loan debt can put people in a more precarious position, unable to weather even mild financial storms.
“People paying off their student debt have less disposable income for other things which may make them more vulnerable to economic shocks,” said Scott Fulford, senior economist at Consumer Financial Protection Bureau (CFPB). “More broadly, debt affects many parts of their lives. For example, there is research suggesting that people with student debt delay buying houses, marrying and starting families. More debt typically makes other borrowing more expensive, a particular problem today with mortgage rates high.”
Lower Income People Tend To Suffer the Most
Student loan debt most aggressively traps lower-income earners, often preventing them from rising in the economic ranks. This feeds into America’s disproportionate division of wealth.
“Students from low-income backgrounds are often more likely to build up large amounts of student debt, which furthers the growing wealth and income inequalities that we face in this country,” Kullberg said. “This can have a compounding effect as some people may avoid pursuing higher education to avoid debt, but as a result, potentially limiting their earnings down the road with lower-paying jobs, thus perpetuating the cycle.”
Student Loan Debt Doesn’t Just Affect Graduates, Either
“Some of the most concerning student debts are held by people who never graduated or who graduated from predatory for-profit schools,” Fulford said. “They don’t have higher earnings and so struggle to pay their loans. In the Making Ends Meet in 2022 report, we looked at people with student debt but no degree. They are mostly low income and have substantially lower financial well-being than people with degrees and debt, and even lower than people without degrees, but no student debt.”
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