College Debt Dragging Down Future of Graduates and Economy

Recent studies delivered another round of warning shots that the U.S. economy is losing a spark from one of its most potent sources – college graduates – because of problems repaying student loans.

Researchers from three separate agencies recently released data that showed graduates are leaving school with so much debt that it’s affecting their ability to purchase new cars and homes, two of the basic staples of the American economy.

The first blast came from a study done by the Federal Reserve Bank of New York that showed the debt amount for 25-year-olds has nearly doubled in the last nine years, rising from $10,649 in 2004 to $20,326 in 2012. The study also said that the percentage of 25-year-olds with student debt rose from 25 percent to 43 percent in that time.

Home buying for that group dropped dramatically during that time from (33 percent down to 22 percent), as did car buying (38 percent down to 30 percent).

“While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace,” said Meta Brown and Sydnee Caldwell, who authored the New York Fed’s report.

“Lowered expectations of future earnings and more limited access to credit may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally.”

Is Anybody Repaying Loans?

Another study released by TransUnion, one of three agencies that do credit reports, paints an even bleaker picture.

According to TransUnion, more than half (51 percent) of student loans were in deferment or forbearance in March of this year. That means the borrower was excused (temporarily) from having to make monthly payments. TransUnion estimated the amount of money not being repaid at $388 billion, a 70 percent jump over the last five years.

There are a variety of legitimate reasons to stop paying a student loan: Going back to school, joining the military or volunteering for the Peace Corps. However, the reason most given was unemployment or under-employment.

Either of those produces a negative cycle for the economy, in that less money is spent on goods or services. The resulting falloff in sales means companies can’t hire new workers and thus unemployment doesn’t improve.

Even Retirement Affected

And piling on is the Center for Retirement Research at Boston College, with a study that shows that student loan debt is crippling college graduates at all ages and could have negative ramifications when they reach retirement age.

The BC study looked at workers in their 30s and determined that 62 percent of them likely will not have enough resources when they retire because they are so bogged down with student debt. According to the study, 20 percent of the people in their 30s have more than $50,000 in student loan debt.

It’s not much better for people in their 40s. The New York Fed says that 5.7 million people ages 40-49 are still paying off student loans, a 72 percent jump from just seven years ago. Even the 60-plus group is growing, with more than 2 million seniors headed toward retirement with loan balances still due.

The Consumer Financial Protection Bureau (CFPB), a new government agency, is looking at ways to help borrowers deal with the problem of student loans, but not even they sound optimistic.

“The ugly surprise after graduation day is that entry-level salaries are often no match for massive monthly student loan payments, or worse, there’s no job available by the time the first payment comes due,” Rohit Chopra, student loan ombudsman for the CFPB, said in a release. “As more people default on their student loans, their credit ratings will drop, making it harder for them to access new credit and help grow the economy.”

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

Sources:

  1. Platt, J. (2012, April 3). Is student loan debt threatening our economic recovery? Mother Nature Network. Retrieved from http://www.mnn.com/money/personal-finance/stories/is-student-loan-debt-threatening-our-economic-recovery
  2. Chopra, R. (2013, February 21). Help stop the student debt domino effect. Consumer Financial Protection Bureau. Retrieved from http://www.consumerfinance.gov/blog/help-stop-the-student-debt-domino-effect/
  3. Rogers, K. (2013, March 15). Real World Impacts of Growing Student Loan Debt. Fox Business. Retrieved from http://www.foxbusiness.com/personal-finance/2013/03/14/real-estate-market-and-college-debt-holding-back/#ixzz2RIOVwNlu