Could Student Loan Debt Threaten the U.S. Economy?

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Do these students understand the impact of their student loan debt? The potential drag of student loan repayment on the U.S. economy may have future impacts on monetary policy. Image by kconnors

Do these students understand the long-term consequences of their student loan debt? The potential drag of student loan repayment on the U.S. economy may have future impacts on monetary policy. Image by kconnors

Student Loan Debt Presents Threat to the U.S. Economy

As with all debt, the more there is to service, the less income remains for discretionary purchases. This problem manifested itself during the financial crisis once housing prices began to plunge, with the net result being the most devastating economic downturn since the Great Depression. Although only about 10% of the potential magnitude of the housing crisis., the sum total of student loan debt nevertheless carries the very real threat of becoming a long-term drag on consumer spending.

Cumulatively, student loan debt in the U.S. brings the issue front and center as not just an individual household issue, but as a macroeconomic concern of massive proportions.

As of today, over $1 trillion in student loans remains outstanding (by comparison, China’s entire external debt is just over $700 million in U.S. dollars).

Fewer state dollars available to direct toward public education in combination with the political and household issues mentioned above have created an impending storm with respect to full repayment of the debt — a problem that has become increasingly multi-generational, with parents often struggling to finish paying off their own student loans while simultaneously helping put their kids through college.

The net effect is less family financial assistance and thus more student loan debt as a result.

College Loans: Debt Increasing

With a total now approaching 7% of the entire GDP and rising rapidly, student loan debt may well be yet another bubble waiting to burst all over the economy. Without question, a college education is still worth its weight in gold. Alas, it takes increasingly more coin in your pocket to pay for it.

Resources

Hsu, Tiffany. College graduates earn 84% more than high school grads, study says(2011). Los Angeles Times. Accessed on August 27, 2013.

College Data. What’s the Price Tag for a College Education? (2013). Accessed on August 27, 2013.

U.S. Department of Education. About Direct Loans. (2013). Accessed on August 27, 2013.

Wang, Brian. U.S. Student Loans Are more than China’s External Debt(2013). Next Big Future. Accessed on August 27, 2013.

Ellis, Blake. Class of 2013 grads average $35,200 in total debt(2013). CNN Money. Accessed on August 27, 2013.

JP. How Much Student Loan Debt is Too Much? (2013). U.S. News. Accessed on August 27, 2013.

Martin, Andrew and Lehren, Andrew W. A Generation Hobbled by the Soaring Cost of College(2012). The New York Times. Accessed on August 27, 2013.

Statistic Brain. American Family Financial Statistics(2013). Accessed on August 27, 2013.

Anthony P. Carnevale, Stephen J. Rose and Ban Cheah. The College Payoff. The Georgetown University Center on Education and the Workforce. Accessed August 27, 2013.

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