How Student Debt Can Harm the Economy

Posted on October 2, 2015 at 12:00pm by
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Student loans could have consequences that extend into areas such as the housing market, consumer spending and economic growth. Almost 40 million Americans have student loans, with the median amount of debt at almost $30,000. For some graduates, this $30,000 burden will make it difficult to start businesses and afford homes, which could have a negative effect on the future American economy.

Some analysts and organizations are more optimistic, claiming student loans have not held back young professionals from buying homes. According to a report from Zillow, a real estate analytics company, home ownership does not decrease based on student loan balances held by graduates. Zillow claims the most important predictor of whether individuals with student loans will become homeowners is whether they finished college.

Those who are more pessimistic, such as the Financial Stability Oversight Council, claim high student loan balances could negatively affect household consumption and would limit access to mortgages. Lenders may see some graduates and former students with high loan balances as too risky.

Would-be entrepreneurs will likely face the same economic barriers. According to a professor of risk management at Pennsylvania State University, people have a “debt capacity”, meaning it is more difficult to commit loans to other areas of their lives, such as creating businesses.

How Else Might Student Debt Affect the Country?

Although this does not necessarily mean an economic Armageddon is imminent, it does show student loans have become an issue for many people. Even if the future economic effects of student loans are minimal, the political impact is likely to be significant. There could be overwhelming political pressure, especially going into the 2016 elections, to restore normal bankruptcy protections and lower interest rates on student loans.

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