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How Debt from Student Loans Affects the Economy [2019]

November 21, 2019Uncategorized

As of 2019, the collective debt from student loans in the US has surpassed $1.5 trillion. With the cost of college tuition increasing every other year or so, it’s becoming increasingly difficult for the massive student population to enroll themselves in the programs and schools of their choice. On the other hand, the rising student loan debt, despite helping millions of students attend school, is like a ticking time bomb.

This also begs another question, as to how the debt from student loans could affect the economy?

Reduced consumer spending, slow growth of small businesses, and less average disposable income are a few things that come up immediately. However, the effects go far deeper.

Continue reading to learn about the different ways student loans are affecting economic growth in the US.

1. They’re Hindering the Formation of New Small Businesses

Whenever crises affect economics, small businesses are the ones that are hit first.

That’s because, on average, these businesses don’t have huge profit margins.

They make just enough to get by and have enough profit at the end of the month to deal with contingencies, and scale (one step at a time).

But, how do student loans affect newer small businesses?

For starters, the formation of new businesses slows down.

As per a study conducted by the officials of the Federal Reserve Bank of Philadelphia, one of the major effects of rising student loans is hindrance in the formation of new businesses.

This negative correlation between the formation of new businesses and rising student loan debt is a clear indication that we’re headed towards economic stagnation.

The report also states that small businesses account for nearly 60% of net employment in the US, which shows the true extent of this problem.

2. Student Loans are Preventing People from Saving More for Retirement

Another effect of rising student loan debt is a decline in retirement savings.

After making monthly debt repayments, together with paying for bills, gas, and groceries, the average citizen doesn’t have enough funds left at the end of the month to add to their retirement savings.

An interesting study conducted in 2018 revealed that, although the number of 401k participants wasn’t declining because of increasing student debt, it sure was affecting the amount of funds the participants (especially the young ones) put towards their retirement.

According to the study, participants with debt had accumulated half as much in savings as those without any form of debt by the age of 30.

Preparing for the future, especially the anticipated rise in rent, utilities, and healthcare, is crucial, and increasing academic debt is stopping many people from saving enough.

3. They’re Slowing Down Consumer Spending

Naturally, a decline in disposable income, attributed to student loans, is forcing consumers to spend less.

To balance out the utilities, groceries, healthcare, savings, and monthly loan repayments, people with debt have no choice but to spend less and make ends meet.

A survey revealed that 1 out of every 10 participants couldn’t afford to buy a car due to their existing debt.

To get by, these people have to rely on other alternatives to fulfill their needs.

On the other hand, a decline in consumer spending spells trouble for economic growth.

4. They’re Making it Difficult to Brave Through Economic Crises

Another thing that makes accumulating debt from student loans a ticking time bomb is the risk of economic recession.

Obviously, those without debt and enough income to get by and still have savings, are more than likely to survive the economic inactivity.

However, those who are knee-deep in debt, would be affected the most.

Unemployment resulting from the recession would lead to an even greater decline in consumer spending, which would, ultimately, make it difficult to come out of the crises.

5. Student Loans are Stopping People from Achieving Personal Milestones

Last, but not the least, increasing student loans are causing people to spend less (or not at all) on their personal milestones.

These includes important events such as buying a house for the first time, getting married, applying for adoption, etc.

As a result, more people are now being forced to take out personal loans to make ends meet.

But, what is a personal loan? It’s a credited fund that you can take out to pay for expenses like medical expenses, personal events, and ironically, student loan repayments.

While it doesn’t make any sense to take out another loan, it can help ease some load and provide student loan help in the short run.

Ending Note

Considering the above, it’s clear that student loans can directly impact the economy.

However, on the other hand, if you were to ask any financial advisor about how to build credit fast, they’d probably suggest taking out a student loan.

Since the repayment periods of these loans are longer than usual, they significantly increase the credit score in the long run.

To conclude, student loans aren’t inherently bad.

The important thing is that we should evaluate everything, from our earning capabilities, to economic conditions, before taking on any debt.