3 Ways Student Debt Affects the Economy

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In the midst of a pandemic workers with higher education have been spared some of the most dire consequences. IN Bureau of Labor Statistics reports that workers with a bachelor’s degree are less likely to find themselves unemployed and earn 67% more than workers with a high school degree. A plus, college graduates live longer than those without higher education.

While student loans may be critical in helping Americans access these benefits, economists say student debt is holding back the economy.

About 45 million Americans collectively owe $ 1.7 trillion in student debt. And although payments on federal student loans have been suspended since March 27, 2020, the student loan crisis is still looming. Moratorium expires on October 1, 2021 politicians and experts warn that millions of borrowers could be thrown into “extreme financial difficulties“when payments resume.

CNBC Make It spoke to Nela Richardson, chief economist at human resources company ADP, spoke about three of the most significant factors in which student debt affects the economy.

1. Generational inequality

Richardson stresses that student debt is worrying because it disproportionately affects young people today. more than in previous generations

Decades cuts in funding for education means that students pay a lot higher college tuition costs than previous generations. Over the past 10 years college expenses increased by more than 16% and total student debt increased by 99%. Today is not only rude 70% of college students take loans to pay for their studies, but they take large volumes

In addition, recent college graduates started working during one of the the most hostile labor market in history for young workers. According to the analysis BLS data Pew Research CenterCollege graduates in 2020 saw a larger decline in labor force participation than college graduates during the Great Recession.

“Student debt falls heavily on the shoulders of young people. They have the lowest incomes and most likely just graduated from college, ”Richardson says. “We know from our data that the pandemic has been disproportionately affected by young people. They were more likely to report job loss, job cutbacks, or pay cuts. When added to student debt, it poses a pretty serious hurdle. “

Result growing generational inequality this will have serious long-term implications, she warns: “It’s about macroeconomic growth. We must take care [about student debt] because the lack of investment among young people really affects the future of GDP growth. “

Federal Reserve data indicates that millennials control only 5% of the US wealth, while baby boomers control over 52%. In 1989, when the baby boomers were about the same age as today’s millennials, they controlled 21% of the country’s wealth.

2. GDP

Student debt affects borrowers over time, increasing the debt burden, lowering credit ratings and ultimately limiting the purchasing power of those with student debt. Since young people are disproportionately burdened with student debt, they will be less able to participate in the economy and contribute to its development in the long term.

“You need broad investment opportunities over time. This is good for the economy. It’s good for Wall Street, ”says Richardson. “If you don’t have that, then you’re seeing a slower growth in the working-age population in its prime — and that’s problematic.”

The Federal Reserve estimates that student debt is roughly shrinking. 0.05% from GDP per year. While the current impact may seem relatively small, as borrowers struggle to buy homes, save money for retirement, and invest in the stock market, the impact could become more significant.

“All those assets that boomers accumulate to feed the economy, who will buy these assets? Who will take action to ensure that equity and asset markets continue to rise? ” Richardson asks. “Maybe boomers can leave this to their children, but it just concentrates wealth, which brings us back to the issue of inequality.”

3. Crime

Finally, there are concerns that many borrowers are expected to student loan default

Currently about $ 158.5 billion Federally administered student loans are considered defaulted – and may increase after the federal student loan suspension period expires. Brookings estimates that by 2023, almost 40% of borrowers default on student loans is expected.

“If you have delays, it lowers your credit ratings, and that’s problematic in terms of doing anything in the economy, from getting a credit card to getting a mortgage,” Richardson says, citing ADP data that suggests that student loans amount to 35% of the loan balances derogatory on the loan, more than three times higher than the level of delinquencies on mortgages.

Richardson fears that due to the difficulties with the student loan, borrowers will not be able to create wealth through means such as buying a home or starting a business. “When you think about how the middle class accumulates wealth over time, there are two paths in the US: home ownership and entrepreneurship,” she says.

While consumer spending is stable so farRichardson stresses that the student debt crisis must be resolved to sustain economic growth.

“If you are very focused on the present moment and the current economic recovery, you can get rid of consumer debt,” she says. “But if you care about the future and think about what leads to increased functionality and investment, then student debt is what can block that.”

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