Student Loan Crisis Burdens the U.S. Economy

May 23, 2013

Student Loans Crisis: The average student debt for 25 year-olds nearly doubled in the last nine years. We haven’t even begun to see the long-term effects of this crisis.

In an economy still attempting to recover from a recession, over $1 trillion of national student debt is going to be harmful, not just for students, but for all of us. Loans that provide access to education are restricting the spending of post-college youths for decades after graduation.

student-loan-crisisThe cost of monthly payments prevents these graduates from contributing to economic growth, impacting banking, housing, entrepreneurial risk taking and retirement. And last but not least, taxpayers will be hurt as many of these loans are backed by the government.

This mostly unregulated, fast-growing student loan crisis has far-reaching consequences and will keep students shackled to promissory notes, which end up carrying a greater weight than once-coveted diplomas.

A Growing Problem

From 2004 to 2012 the overall amount of student debt nearly tripled, reaching $1 trillion, which makes it the second largest type of household debt for Americans, with only mortgage debt exceeding this balance. And this number may continue to grow as 90 percent of parents expect children to attend college.

The average debt for 25 year-olds nearly doubled in the last nine years, according to a study by the Federal Reserve Bank of New York. In 2004, the average debt amount was $10,649, and it rose to $20,326 in 2012. These students are graduating without a feasible plan to make monthly payments and afford living expenses.

About half of students are also seeking to defer, or temporarily excuse, loan payments. Many of these requests were made because of unemployment or underemployment, which means students are unable to spend money on goods and services, damaging the economy.

RELATED: How to Save for College AND Retirement With Small Children

The Housing Market Suffers

Since 2004 the amount of 25 year-olds purchasing homes has dropped around 10 percent. As many young adults are burdened by loans, they are unable to get approval for mortgages and some cannot even afford monthly payments. The housing market would have been boosted by this demographic of buyers, as young, first-time buyers have historically made up a significant portion of the housing industry.

Future buyers will also be restricted as students who cannot make payments on loans may be doing long-term damage to their credit scores.
Damaged Credit and No Bankruptcy Option

In addition to not receiving mortgage approvals, those who have damaged credit scores are unable to purchase new vehicles, qualify for business loans and save for retirement. As a result, these potential consumers have limited options and the economy suffers in multiple areas. The demand for vehicle, loans and retirement plans decreases. There are fewer small businesses starting up. And people are retiring without enough saved to cover living expenses.

Perhaps worse than this is borrowers who have run out of options and turn to bankruptcy to resolve financial matters; they are not likely to receive relief from student loans. The debt will continue to weigh on their shoulders.

Waiting on Congress

In 2007, the Public Student Loan Forgiveness Act was passed, allowing people working in qualifying public service jobs to receive loan forgiveness after 120 payments and 10 years of work. While this act provides relief to some students, those who work in different fields are still looking for answers.

Student debt burdens graduates and threatens to stifle recovery from the recession. Today, many are looking to congress to pass legislation to assist students with paying back loans. The interest rate on some federal loans had previously decreased to 3.4 percent, but will be returning to 6.8 percent in July, requiring more attention before student debt increases at an even greater pace.

Article courtesy of Alanna Ritchie of Debt.org.

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