February 12, 2020

With more than 44 million adults in debt due to student loans, a significant percentage of consumers have to spend part of their hard-earned money on repaying debt.

It's a type of debt with a long-term effect on the economy, as the average balance is above $37,000 and will take years to pay off.
The economic effects of student loans are spreading to different industries and are contributing to slow economic growth.

How do student loans lead to slow economic growth?

Disposable income is a term that describes what consumers have left after paying taxes and other necessary expenses like their mortgage, insurance premium or utility bills. Having to make monthly payments on a student loan balance significantly reduces the amount of disposable income available.

Borrowers have to balance their budget to meet their financial obligations, and 42% of them are delaying the purchase of a new car. Industries that rely on large purchases are feeling the effects of the student loan crisis because borrowers are careful about charging those purchases. Besides, businesses that sell discretionary goods are less likely to benefit from impulse buys.

The burden of student loans is resulting in a drop in demand for a wide range of goods and services. Borrowers delaying purchasing a car, a home or starting a family means they won't need to purchase goods and services that a consumer who is raising children or maintaining a car or home is going to need.

Student loans and the housing market

A home for sale

Borrowers are hesitant about adding a mortgage to their financial obligations. One in three adults with student debt says that their monthly loan payment is higher than their rent or mortgage, and 27% of borrowers still live with their parents.

Being in debt makes qualifying for a mortgage difficult, and 41% of graduates with a student loan balance say they are delaying homeownership. That trend is one of the factors that is creating a slow housing market.

Entrepreneurship and employment

Launching a new business often requires entrepreneurs to use their own savings or apply for a loan. Student loans are putting a damper on entrepreneurship: 25% of graduates with more than $25,000 in debt say they are delaying launching a business.

A drop in entrepreneurship leads to a business environment where innovation and competitiveness are reduced, contributing to slow economic growth. Having fewer business launches also results in slow job creation.

The pressure of keeping up with student payments is reducing mobility. Two out of five borrowers say they have avoided quitting a job. That phenomenon could limit the number of employees looking for new opportunities.

Financial outlook

Graffiti on a wall reads "student debt ruined me."

Student loans are slowing economic growth and shaping the financial outlook of borrowers. Saving for retirement is difficult for 80% of them, which means they will have to catch up on their savings later in life and will continue to have limited levels of disposable income.

Some borrowers might be unable to save enough to retire and will depend on government assistance programs. Government assistance programs might also have to shoulder expenses linked to healthcare. Some borrowers are delaying treatments like dental care due to their financial burden.

The U.S. federal government is currently spending $170 billion a year on loan forgiveness and defaults. That expense, combined with the repercussion of student debt on the economy, shows that it's time to make some changes.

Get involved with It's Up to Us to draw attention to the student debt crisis!